LOCALIZATION

In the coming years, the need for localization will only grow. An increase in demand for Russian goods or foreign ones, but localized in Russia, is expected. It is also likely that direct supplies of products from abroad will decline, which ultimately may lead to the loss of the Russian market for foreign companies that do not dare to localize in the Russian Federation.

Table of Contents

localization

Benefits & Restrictions

Since 2014, the importance of localization and import substitution has rightfully become one of the priority areas of the Russian economy.
With several Western countries imposing sanctions against Russia, the Russian Government has decided to introduce countermeasures and significantly reduce its dependence on foreign goods and services. Import substitution is adopted as the basis of the national industrial policy. This trend presupposes a new approach to international market players to substitute imports and increase domestic production. However, such measures may not be canceled when sanctions against Russia are eventually lifted.

Tightening regulations are driving the need to replace more imported products with locally made products. Although foreign products are not completely to for government procurement, but limited, it is important for foreign companies to continue looking for more efficient ways of working unleash the potential of the Russian market.
An increasingly high priority for international companies is the ability to adapt and cope with changing conditions and uncertainty.

At the same time, this situation offers great opportunities. Companies that decide to localize their business in Russia have the following advantages:

competition

low level of competition

doing business

prospects for organizing production

first in your niche

opportunity to become the first in your niche

organizing production

enabling conditions for doing business

low cost

low-cost production

large market

availability of a large market of the Eurasian Economic Union

Terminology

We understand that all the definitions that are used concerning localization and import substitution processes seem unclear at first and can even be confusing. Meanwhile, understanding the general context and all the subtleties of terminology cannot be overestimated.
We are ready to explain the main nuances.

Already at the stage of operation, it is possible to change the production and economic parameters of localized production to improve them, if necessary.
Import substitution measures are:

1. Incentives

  • reduction of customs tariffs for the import of products to the Russian Federation (partially)
  • investment contracts on certain conditions

2. Limitations

Federal Law No. 488-FZ of December 31, 2014 «On Industrial Policy» directly affects the activities of foreign organizations. The adoption of this law changed the public procurement system: now the preference is given to goods produced in Russia. The state sector plays a colossal role in the Russian economy. If foreign companies want to avoid serious restrictions on entering the Russian market and take part in non-discriminatory tenders, it is important to take into account such legislative changes. The way out of this situation is localization in Russia.

3. Political instruments

LOCALIZATION OF PRODUCTION is an instrument of national industrial policy aimed at stimulating production in Russia and consisting of certain rules and requirements.
Localization also implies an increase in foreign investment and the introduction of new technologies in the country. The essence of localization is the transfer of the production of a well-known product or business solution to the country of presence. This process involves identifying the most profitable production site to reduce competition and the cost of the entire supply chain from producer to consumer.
Localization can be reached by using local components in production, transferring technology to a resident or carrying out economic activities (production) on the territory of the country, or by concluding a Special Investment Contract (SPIC).
Also, the products have such a status as «MADE IN RUSSIA», which means the marking of goods produced in the Russian Federation. However, this status largely supports Russian companies and culture, participation in this “brand” (status) will not help with the implementation of specific localization steps.

How to

Available localization methods are:
1

LOCAL PRODUCTION according to regulatory criteria:

CONTRACT MANUFACTURING

own production without its own facilities, organized by other companies under a contract. Company — customer — trademark, name, and idea, promotion of products, works or services;

JOINT VENTURES

created for strategic cooperation, which are independent business entities for further advancement.

CREATION OF OWN PRODUCTION

construction of own production, which is managed by a subsidiary of an international company.
There is another alternative to the so-called «brownfield» or «greenfield»: SPECIAL ECONOMIC ZONES, which offer special benefits to residents
  • Increased speed of entry to the production site
  • Affordable infrastructure
  • Cheap land
  • Flexibility in choosing a production site with an effective layout
  • Significant financial benefits (low or 0 taxes)
  • State guarantees for the unchanged rules for residents until 2054
  • Free customs zone
  • «Single window» approach for solving emerging issues
  • No minimum investment threshold
2

Classification of foreign goods as a UNIQUE INDUSTRIAL PRODUCT that has no analogues, produced in the territory of the Russian Federation (Resolution of the Government of the Russian Federation dated September 20, 2017 No. 1135).

To obtain this status, a company must comply with the framework in the following categories:
  • Energy efficiency
  • Metrological characteristics
  • Data on productivity, profitability
  • Maintainability, delivery volumes
  • Quality
  • Ergonomics, staffing
  • Reliability
  • Security
  • Sustainability, environmental impact
3

SPECIAL INVESTMENT CONTRACT (SPIC), currently - SPIC 2.0.

SPIC is an agreement between the State and an investor that provides for a number of obligations:
  • on the part of the State — ensuring a stable business environment and implementing measures to stimulate and support the industry
  • on the part of the investor — creation or modernization and introduction of industrial goods into production on the territory of the Russian Federation
The amount of funds invested is not limited.

Preferences of the SPIC:

  • Taxpayer immunity from worsening tax conditions
  • Tax incentives
  • Preferences (including tax and land) at the regional level
  • Possibility of obtaining the status «Made in Russia» under a simplified procedure
  • Access to state support and state procurement

Duration of the SPIC:

  • no more than 15 years, if the volume of investments is less than or equal to 50 billion rubles (excluding VAT),
  • no more than 20 years, if the volume of investments is more than 50 billion rubles (excluding VAT).
The SPIC can be concluded until December 31, 2030.
Already at the stage of operation, it is possible to change the production and economic parameters of localized production to improve them, if necessary.

How to choose a localization method

The method of localizing production depends on:
  • Type of product and end user
  • Target market
  • Financial business model
  • Amount of investment
It is necessary to decide which of the localization methods is more attractive, bearing in mind external circumstances and market conditions and considering all the risks and benefits arising from investing in localization.

Criteria

1
Government Resolution No. 719 of July 17, 2015 «On the confirmation of the production of industrial products on the territory of the Russian Federation»
a. Execution of some production processes and after-sales service in Russia the Eurasian Economic Union countries
b. Percentage of the cost of components and raw materials in the final price
c. Manufacturer’s rights to design and technical documentation
2
Goods not specified in the Resolution No. 719 are subject to the Criteria of the Agreement of Governments of the CIS member states of November 20, 2009 «On Rules for Determining the Country of Origin of Goods in the Commonwealth of Independent States».
The conditions for a particular product should be checked individually, depending on the specific product and the industry as a whole. At the same time, the general national requirements for limiting the import of industrial products and the development of localization in the Russian Federation are the same.

Process

As soon as the company decides to localize production in Russia, it is necessary to proceed with the following steps.
1
Assessment of the market capacity of a specific product / technology; analysis of potential consumers, competitors, business reputation, availability of trademarks, service marks, brands, etc.; identifying possible technology partners for localization.
2
Negotiations with potential partners, conclusion of an agreement of intent, memoranda of understanding, etc.
3
Determination of technological capabilities and principle of production organizing: assembly, features of components and distribution of technological processes etc.
4
Strategic financial planning, selection of possible sources of funding, calculation of the share of participation and sales strategy. Formation of a detailed financial plan for the most promising localization option, calculation of the required financial indicators of the project and estimated costs planned sales volumes. Development of a financial and economic model of the project.
5
Legal registration of localization agreements, if necessary, the creation of legal entities.
6
Selection of production sites for performing technological operations, coordination with partners. Development of principles for creating divisions, delegation of authority and distribution of responsibility within the framework of the project between partners and / or within the framework of a joint venture.
7
Technological preparation of production incl. equipment, organization of warehouses, search and training of qualified personnel involved in the project.
8
Registration of the necessary technical and licensing documents and certificates.
9
Start of production.
Already at the stage of operation, it is possible to change the production and economic parameters of localized production to improve them, if necessary.

Procurements

Three main Federal laws regulate public procurements. All contracts with local and international suppliers are also governed by these regulations.

Federal Law 44-FZ of April 5, 2013 «On the Contract System in State and Municipal Procurement of Goods, Works and Services»

  • Foreign product application will be rejected if at least one application with a Russian product participates in the tender.
  • Exceptions are possible under certain decisions of the Government of the Russian Federation.
  • Prohibition of the acquisition of foreign goods of certain categories in accordance with a number of rules (for example, Resolution No. 9 of January 14, 2017, No. 1236 of November 16, 2015, etc.).
  • Goods and industries falling under 44-FZ
  • Medical equipment (Resolution No. 102 of February 5, 2015)
  • Pharmaceuticals (Resolution No. 1289 of November 30, 2015)
  • Radio electronics (Resolution No. 878 of July 10, 2019)
  • Food products (Resolution No. 832 of August 22, 2019)
  • Weapons (Resolution No. 1119, September 20, 2018).

Federal Law 223-FZ of July 18, 2011 “On the procurement of goods, work and services by certain legal entities”.

Procurement of all goods and services, except for securities, precious metals, etc. of domestic origin have priority over foreign goods and services for budget organizations, state-owned companies, strategically important enterprises, monopolies etc. (Resolution No. 925 of September 16, 2019)
Each purchasing authority may have its own procurement rules
Public procurement is regulated separately from government procurement. According to Resolution No. 925 of September 16, 2019, which clarifies 223-FZ, Russian goods have priority over foreign ones.
Despite the fact that this law does not formally introduce any prohibitions and restrictions to minimize possible risks, some large organizations (for example, in the oil & gas and railway industries) set their own restrictions on the purchase of foreign goods, despite the formal absence of such a requirement.

This law regulates the development of local production in Russia. The main thing is that domestic suppliers (incl. natives of the EAEU countries) have an advantage in public procurement processes. This is confirmed and developed in 44-FZ and 223-FZ.
Goods and industries falling under 488-FZ
  • Mining
  • Industrial manufacturing
  • Energy
  • Gas and vapour
  • Air conditioning
  • Water supply and disposal
  • Recycling
  • Prevention of pollution

Recommendations

First, we recommend that international enterprises weigh their real need to enter the promising Russian market, which will lead to localization, and proceed to painstakingly developing appropriate strategies for further successful competition with Russian manufacturers.
Foreign companies that plan to participate in public procurement should study in detail the Russian legislation regulating these issues. It is also important to take into account the possibility of concluding a SPIC when planning localization in Russia.
An alternative way for an international manufacturer is to produce a product that has no analogues in Russia.
Foreign companies should be aware of current changes in industry legislation.
Companies need to think over all the details of project promotion, from legal form to presentation to the end consumer.
Due to the peculiarities of Russian legislation and market conditions, it is necessary to take into account the possible adaptation process.
It is also important for international companies to study the issues of calculating customs duties, tax rates, as well as the need for certification and obtaining administrative opinions in each specific case.
We know how to help foreign companies expand their business in Russia, and we are ready to provide comprehensive advice on the way to localization.

TLC can help plan and implement each stage of entering the Russian market and developing your business in Russia.

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