17. Import substitution and production localisation

General

Since early 2010-es, the Russian Government and legislators have adopted measures aimed at increasing domestic production of goods and reducing the country’s dependency on foreign goods. The events of 2014 and 2022 further reinforced these measures, highlighting the economic risks associated with dependence on imported goods that (i) could be disrupted at any time by sanctions; and (ii) are subject to currency exchange rate volatility.
Relatively cheap and qualified local labour force, a free access to the CIS markets¹, together with the various incentives for foreign companies localising their production in Russia, have made the country an attractive place for production of goods.

¹ Russia is a party to the Commonwealth of Independent States Free Trade Area (CISFTA) between Russia, Ukraine, Belarus, Uzbekistan, Moldova, Armenia, Kyrgyzstan, Kazakhstan and Tajikistan. However, Russia has suspended this regime towards Ukraine since 2016. In addition, Russia has bilateral free trade treaties with other CIS countries like Azerbaijan.

Import substitution

Russia’s import substitution policy is driven by foreign sanctions and the need to reduce dependence on imported goods.
One of the key measures of the Russian government is identifying “critical industrial products” in key economic sectors such as heavy engineering, construction, pharmaceuticals, electronics, robotics, etc. Lists of such products are updated from time to time and predetermine industrial and regulatory policy of Russia, especially when providing various localisation incentives and imposing restrictive measures against foreign goods.
An example of localisation incentive is granting preferences to locally produced products in the frames of public procurement of goods. Such preferences are granted in the framework of the Industrial Policy Law and Procurement Law. See the next paragraph for more details.
The restrictive measures usually take form of import and export sanctions against products originating from the US, EU, UK, Ukraine and other so-called “unfriendly” countries.
Preferences to local products in the public procurements
Technically, the state and municipal authorities may purchase both domestic and foreign goods.
However, to support Russian production, the Government establishes special restrictions complicating or even prohibiting the procurement of foreign goods.
As of 1 January 2025, fragmented regulations were replaced by the single legal act – Russian Government Decree No. 1875 as of 23 December 2024 (the “Decree No. 1875”).
The Decree No. 1875 introduced three main legal instruments the Government can use to favour local goods over foreign ones in the public procurements:
· Prohibition – any bid offering goods of foreign origin is rejected;
· Restriction – all bids offering goods of foreign origin are rejected if there is at least one bid which offers goods of Russian origin (the “second one out” rule); and
· Preference – a bidder who has offered goods of Russian origin benefits from a 15% price preference (i.e. a reduction in price offer for the sole purpose of determining the winner; in the event of winning the contract is concluded at the price offered by the winner).
For the purposes of applying the exemptions, goods from the EAEU are equated with Russian ones.
There are also certain types of foreign goods that can only be procured when there are no domestic or EAEU analogues. Such procurement requires authorisation from the competent authority or notification thereof, depending on the type of good.
Apart from the above procurement restrictions and preferences, Russian legislation also provides for a minimum mandatory share of goods of Russian (or EAEU) origin that should be observed by some purchasers falling under public procurement regulations. The respective list includes more than 270 types of goods. Depending on the good, the quota for purchase of Russian (or EAEU) products may be up to 95%.
Russian sanctions and other trade protectionist measures
In addition to the general non-country specific limitations on foreign goods, Russia has also imposed certain country-specific sanctions and countersanctions on some foreign goods.
The banned goods, according to Russian Government Decree No. 778 as of 7 August 2014, include certain agricultural products, raw materials and food items, which are originating from the above-listed countries. For instance:
· 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.
However, beef, poultry, frozen and dried vegetables, which are used for making baby foods, as well as some other goods, were subsequently excluded from the list of food items that are under embargo².
The Russian Government says it will continue to respond proportionately to any “unfriendly” actions. From practice, the Government’s response may take form not only of import restrictions, but of export ones as well.
For instance, the Russian Government Decrees Nos. 311, 312 and 313 dated 9 March 2022 have imposed broad export restrictions affecting laboratory and industrial equipment. Depending on the type of goods and the country of destination, the Decrees either establish a blanket ban on exports or require that a special permit from the Russian Government or regulatory authority.

² The list of sanctioned goods may be adjusted from time to time.

Localisation incentives

Along with the above restrictive measures, the Russian Government and legislators have created several incentives for foreign companies to localise their goods in Russia by opening or contracting production plants in the country, instead of simply importing the finished goods from their factories in other countries.
The main types of incentives are:
· Advantages in public procurements;
· Goods produced in Russia are not subject to the export restrictions (e. g. most restrictions established by the mentioned Decrees Nos. 311-313 do not apply to products of a Russian origin);
· Tax benefits; and
· Subsidies.
“Made in Russia” solution
The restrictions imposed on imported goods effectively and significantly limit the access of importers of foreign goods to the Russian market.
Accordingly, foreign companies whose goods are subject to restrictions can maintain their shares or get full access to the Russian market if they open or contract production plants in the country. Such plants can use imported components. However, they must carry out production activities that will allow their end products to be classified as domestic ones.
The rules of qualification of the product as domestic depend on the product category. As a general rule, a product is recognised as domestic if it is fully manufactured or is “sufficiently processed” in the country.
There are two main criteria for defining sufficient processing:
· Formal criterion: as a result of processing, one product is transformed into another in such a way that, according to the classification of goods for customs purposes³, leads to a change in the first four digits of the product’s classification code (e.g. a plank, which has code No. 4407, is manufactured into a wooden box with code No. 4415);
· Value criterion: this is when industrial or technical processing leads to a certain percentage of added value increase in the finished product, compared to its components. There are specific rules as to how to calculate such added values for different types of goods.
However, for certain products the special system of so-called “localisation points” is stipulated. The Government establishes (i) the number of localisation points corresponding to a particular manufacturing operation (e. g. 30 points for packaging), and (ii) the threshold of localisation points (e. g. 150 points) allowing to deem the product domestic. This system gives the companies more flexibility in selecting what operations will be localised in Russia and how to achieve the localisation of production most efficiently.

³ Decision No.80 of the Council of the Eurasian Economic Commission “On Approval of the Common Commodity Nomenclature for Foreign Economic Activity of the Eurasian Economic Union and the Common Customs Tariff of the Eurasian Economic Union” dated 14 September 2021.

General direct investment incentives

The list of direct investment incentives available in Russia includes, inter alia:
· Obtaining the status of a participant in a regional investment project.
A company implementing an investment project for creating new production facilities or expanding existing production may obtain the status of the participant in the regional investment project, provided that it complies with specific requirements.
Such requirements relate, among other things, to the minimum capital investment volume, the project’s location, and scope of production activities.
The key benefit of obtaining the concerned status is access to tax incentives, including a reduced corporate profit tax rate and, where provided by regional legislation, exemptions from or reductions in regional taxes.
· Locating production in an industrial park or production cluster.
The Industrial Policy Law treats industrial parks and production clusters as mechanisms facilitating localisation of production.
Both mechanisms provide investors with access to developed infrastructure and assistance in dealing with administrative and regulatory matters. They also make investors eligible for various federal and regional support measures (e. g. subsidies, tax incentives, subsidised loans, etc.).
· Becoming a resident of a special economic zone.
There are more than 30 special economic zones for localising the production. The main benefits of the residence in the special economic zone are reduced tax rates, relaxed customs regime and land lease preferences.
· Bilateral investment treaties.
Russia has concluded bilateral investment treaties with dozens of foreign states, including China, UAE, Thailand, Vietnam, Republic of South Africa, and others.
The content of these treaties varies from one to another, but in general they ensure that investors from the signatory countries are not discriminated compared to local investors or those from third countries.
The treaties also provide for a special dispute resolution procedure in case the investor considers that Russia has breached the treaty, thereby affecting the security and effectiveness of the investments made.
· Subsidies from the state budget.
Regulations provide for various subsidies to support local production. The conditions for their provision depend on the economic sector and the region where production is located. Among others, the subsidies may reimburse interest paid under industrial loans and cover expenses related to production automation.
· Special investment contracts (SPICs) and agreements on the promotion and protection of investment (SZPKs), as the most useful and popular instruments for promoting the direct investments in local production, are described below in more detail.
The listed instruments may sometimes overlap and synergise with each other.

Special investment contracts (SPICs)

The Industrial Policy Law created a contractual framework for projects in the industrial sector by introducing the concept of SPICs. Under such contracts, investing companies that undertake to implement investment projects will be guaranteed long-term incentives by the Russian State (tax benefits, guarantees for non-deterioration of regulatory environment (so-called stability clause), subsidies, etc.).
New rules for entering into SPICs (also known as “SPIC 2.0”) were adopted by Federal Law No. 290-FZ “On Amendments to the Federal Law on Industrial Policy regarding the Regulation of SPICs”⁴. In particular, SPIC 2.0 has the following specifics:
· SPICs are available only to those investors who intend to introduce modern technologies (as indicated in the list approved by the Russian Government⁵).
· A SPIC has to be entered into through a tender process initiated by the public party or the investor itself.
· The duration of a SPIC will depend on the volume of investments but will not exceed 20 years.
· No minimum investment threshold is established.
· No other participants (e. g. distributors, service companies) on the investor’s side can participate in SPIC.
To accelerate the production of industrial products, the Government has renewed the possibility to conclude SPIC 1.0 as well (besides SPIC 2.0 as described above). This is the first model of SPICs introduced in Russia and previously it was unavailable due to the introduction of SPIC 2.0 rules. Amongst others, SPIC 1.0 differs from SPIC 2.0 in the following:
· SPIC 1.0 has a wider application scope: it does not require the investor to introduce modern technologies from the Government’s list.
· There is a minimum investment threshold (RUB 750m).
· SPIC 1.0 allows the investor to involve third parties in the framework of SPIC (distributors, engineering centers, etc.).
· The maximum duration of SPIC 1.0 is 10 years.
· The companies from so-called “unfriendly” states (US, UK, EU, Canada, etc.) cannot apply for SPIC 1.0.

⁵ Russian Government Decree No. 3143-r dated 28 November 2020.

Agreements on the promotion and protection of investment (SZPKs)

Another relatively new federal law aims to regulate the conclusion of agreements affording support to investments in the Russian Federation⁶. This law introduces a special type of agreement – on the promotion and protection of investment (SZPK).
Unlike SPICs, SZPKs are supposed to be used not only in production-based industries, but also in other sectors such as services, intellectual property, infrastructure. The contract conclusion process is less formal than that applicable to SPICs. SZPKs can be concluded following either a public or private project initiative.
The key benefit for a private investor to enter into an SZPK is the stability clause ensuring that investor’s business activities will not be in any worse position as a result of any changes in applicable laws after the relevant SZPK is concluded.
The scope of the stability clause may vary depending on the amount of capital investments, the sector of the economy and the level at which the SZPK is signed (federal, regional or municipal).
In addition to the stability clause, an SZPK may provide for additional measures of state support such as tax incentives, subsidies, full or partial reimbursement of expenses relating to the creation of infrastructure and other measures.

⁶ Federal Law No. 69-FZ “On the Protection and Promotion of Capital Investments in the Russian Federation” dated 1 April 2020.