CLS_Import_Substitution 14-01-2015 _E_16-9

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© 2015 CAPITAL LEGAL SERVICES INTERNATIONAL, L.L.C.

FINLAND, TAMPERE, MARCH 2014

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Capital Legal Services

Import-substitution in Russia:

risks and opportunities

Dmitry Churin

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FINLAND, TAMPERE, MARCH 2014FINLAND, TAMPERE, MARCH 2014

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© 2015 CAPITAL LEGAL SERVICES INTERNATIONAL, L.L.C. 2

Content

• Key points of import substitution policy

• Localization requirements

• Risks of localization for Finnish companies

• Ways to manage risks

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Import-substitution policy

“Only unique equipment and

technologies shall be imported”

(Mr. V. Putin, Presidential Address to the

Federal Assembly, 2014)

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Implementation of import-substitution: measures

State backing of domestic producers

• State loan guarantees

• Special-purpose loans from development funds

• Subsides for financing of industrial infrastructure

• Contracts with “Grandfather clause”

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Implementation of import-substitution: measures

Barriers to foreign companies and goods

• Prohibition of state procurement of foreign goods

• machinery goods

• light industry

• medical supplies

• Limiting state procurement of foreign software

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Why import-substitution requires foreign participation?

A1. To fulfill “local origin” criteria

A2. To acquire foreign technologies

• while using foreign materials

• if conducting only assembly of imported parts

• with the use of foreign technologies

• for production of science-intensive products locally

• to produce goods for purposes of procurement

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How to take part in import substitution?

• To jointly create company with Russian

Partner (SPV)

• To localize production in Russia

• To license IP and other technology rights to a

Russian partner

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Criteria of Determination of country of origin

Product of

domestic originDomestic materials, parts and local assembly

Use of materials from 3rd countries

Sufficient Domestic Processing

Processing results in change of at least one of the first four digits of Commodity

Nomenclature for FEA

Execution of ad valorem share rule

For most products

Certain products specified in government list

Certain conditions provided in Decree

Agreement on Determination of Country of Origin of Goods inCommonwealth of Independent States dated November 20th, 2009

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Passenger car

Fire-fighting Truck

Item Sufficient Domestic Processing

Processing in which the cost of the materials used must not

exceed 50% of the final product and certain operations

performed (welding body, engine installation etc.)

Ship, vessel, boat Processing in which all materials used must be classified

(Commodity Nomenclature) differently from the final product

Processing that results in change of at least one of the first

four digits of Commodity Code (Nomenclature)

Criteria of Determination of country of origin: examples

Agreement on Determination of Country of Origin of Goods inCommonwealth of Independent States dated November 20th, 2009

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Russian Software:

criteria

Foreign Software:

Procurement

permitted if:

• No available software of the necessary class is included in register

of Russian software;

• Software of the needed class is available in the register but does not

meet contractor’s specification.

Restrictions on Foreign Software for State Procurement

Exclusive rights for software owned by:

• Russian commercial organization (direct or indirect foreign

ownership shall be less than 50%)

Less than 30% of yearly software-related revenue shall be paid to:

• foreign organizations and foreigners;

• Russian organizations controlled by foreigners.

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Risks of import substitution

• The SPV along with transferred rights and

assets may fall under the partner’s control

• Disclosure of Know-How, Trade Secrets and

other data or technologies

• Derivative patenting and/or Trade Mark

registration in Russian Federation by a partner

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How to manage risks while taking part in import substitution?

Detailed review of agreements from Russian

legislation perspective

Due-diligence of the contracting party

Establishment of trade secret regime and use

of NDA

Preventive patenting and TM registration in the

Russian Federation

… and other measures!

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Import-substitution policy

Adverse effect on foreign

businesses

opportunities for investors

and ones ready to localize

or…

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Thank you for your attention!

MSC

SPBBoutique Office Center “Passage / Italianskaya 17”

17 Italianskaya Street

191186 St. Petersburg, Russia

+7 812 346 7990

FIN Mannerheimintie 16 A 4

FIN-00100, Helsinki

+358 (0) 20 7346 490

Sadovaya Plaza business center

7 Dolgorukovskaya Street

127006 Moscow, Russia

+7 495 970 1090

Documents

CLS_Import_Substitution 14-01-2015 _E_16-9