Over the past two years, Russia has expressed its intent to significantly increase investment opportunities in the Russian Far East including in the areas of infrastructure development, ship and oil rig building, trade, production of advanced technology products, tourism, and agriculture. The Russian government plans to develop the Russian Far East into a leading global business, energy and trade hub.
Russia’s renewed effort to stimulate investment and growth in this region was showcased at the First Eastern Economic Forum, held in Vladivostok, Russia in September 2015, which resulted in more than 80 major investment contracts for over 1.3 trillion rubles (approximately 20 billion US dollars).
Much of the legislation implementing special incentives for investment in the Russian Far East is already in place; and this legislation is likely to be enhanced further in support of Russia’s desire to develop the region and attract investors, with a strong focus on Asian investors.
Vladivostok Free Port
The sea port of Vladivostok is one of the most efficient and effective international sea routes for many countries, including Japan, Korea and China. The Port of Vladivostok is ice free and was established in 1897.
In the summer of 2015, Russia passed a law introducing a simplified regime for entering into and conducting business within the sea port of Vladivostok including the area adjacent to the port of approximately 28,000 sq.km (the sea port together with adjacent territory subject to relevant regime is referred to herein as “Vladivostok Free Port”).
The special regime for Vladivostok Free Port is established by Federal Law No. 212-FZ “On Free Port of Vladivostok” dated 13 July 2015 (“Law on Vladivostok Free Port”) and a number of laws introducing amendments to other legislative acts.
The regime of Vladivostok Free Port has been established for an initial term of 70 years that may be extended upon the decision of the federal government. The Vladivostok Free Port benefits from the following:
- Eased visa regime
Any person entering Vladivostok Free Port benefits from a simplified visa regime. When crossing the Russian state border at Vladivostok Free Port, a short-term visa can be issued immediately at the border.
- Tax benefits
The residents of Vladivostok Free Port enjoy a number of tax benefits, including (i) a decreased profit tax rate of 5% for the first five years of operation within Vladivostok Free Port; (ii) 5-year tax holidays for property tax and real estate taxes; and (iii) limitations on number, scope and duration of tax inspections by Russian tax authorities. In order for a company to acquire a status of a “resident of Vladivostok Free Port”, it must be incorporated within the territory of Vladivostok Free Port and enter into an agreement of operation within Vladivostok Free Port in accordance with the terms established by the Law on Vladivostok Free Port.
- Customs benefits Pursuant to the Law on Vladivostok Free Port, the territory of Vladivostok Free Port is a special economic zone and subject to the regulations on special economic zones of the Eurasian Customs Union (uniting Russia, Belorussia, Kazakhstan, Armenia and Kyrgyzstan). The regulations provide for duty-free import and re-exportation of goods and equipment originating from the countries of the Eurasian Customs Union and other foreign countries.
- Public-private partnership support The Law on Vladivostok Free Port provides for state financial support with respect to projects within public-private partnership arrangements. The support is to be provided primarily for projects related to transportation and energy infrastructure, utility services, social sphere and innovations. The public-private partnership projects also benefit from simplified procedures for obtaining various permits (including construction permits).
- Lease of state land plots Residents of Vladivostok Free Port benefit from a simplified procedure for lease of state land plots whereby state land plots are provided for residents’ needs upon their request without a tender or auction.
- Ease of Employment Vladivostok Free Port is exempt from limits (quotas) on the number of foreign workers that are generally applicable in Russia and enjoys simplified procedures for obtaining work permits. The resident companies also benefit from lower rates of mandatory social insurance payments with respect to their employees.
- Coordinated Management
Vladivostok Free Port is managed jointly by the following bodies:
- The Supervisory Board is a collegiate body consisting of representatives of federal and local governing bodies that is in charge of general supervision over business and social activities within Vladivostok Free Port (e.g., the Supervision Board approves development plans for Vladivostok Free Port);
- An authorized federal body, which is currently the Ministry of the Far East, is responsible for certain specific business related functions such as granting long-term lease rights with respect to state land plots; the Ministry of the Far East can delegate certain of its powers to the Management Company;
- The Management Company is responsible for daily management of Vladivostok Free Port, including with respect to conclusion of agreements with companies required for obtaining the status of a resident and monitoring the compliance with the terms of relevant agreements. As of today, the functions of the Management Company are performed by JSC Corporation for Development of the Far East, a one hundred percent state owned company.
- The Public Council, an advisory body (that can be established but is not yet established), which is composed of representatives of trade unions, business associations, etc.
The Russian Government has recently suggested extending the preferences established for Vladivostok Free Port to other Far Eastern harbors in the near future.
Oil & Gas Shipbuilding
The Russian Far East will become home for the first of its kind in Russia—a shipbuilding cluster centered around Zvezda in the town of Bolshoi Kmen, 12 miles northeast of Vladivostok.
It is envisaged that the JSC Far Eastern Shipbuilding and Ship Repair Center (FESRC) will ultimately coordinate the shipyards in Bolshoi Kmen. In mid-2015 Rosneft and Gazprombank Consortium consolidated a majority share in FESRC (25% plus one share remained with the Russian state and is held by state company JSC United Shipbuilding Corporation). The sale of shares was performed in compliance with the Presidential Decree of 21 July 2014 that provided for a number of measures to be implemented in order to boost shipbuilding in the Russian Far East.
The partners are expected to invest 47 bln rubles in the near future with the aim of building 50 drilling platforms, 80 tankers and 200 other ships by 2020.
Tourism - Development of Hotels and Casino
In October 2015 the first casino Tigre de Cristal opened in Primorskoye entertainment zone located in Muravyinaya Bay near the city of Vladivostok. The Primorskoye entertainment zone is one of the four selected zones in Russia where gambling is permitted. This entertainment zone was established by law in 2006, when Russia prohibited the organization and conduct of gambling activities except within the four specially designated zones. The Primorskoye entertainment zone comprises over 600 hectares (approximately 1,483 acres) of land that is to be used for the development of various entertainment centers, casinos, hotels, yacht clubs and other tourist facilities.
Territories of Accelerated Development
A number of territories within the Far East region also benefit from special treatment somewhat similar to that available within Vladivostok Free Port established by Federal Law No. 473-FZ “On Territories of Accelerated Social and Economic Development in the Russian Federation” dated 29 December 2014 (“Law on Territories of Accelerated Development”).
Pursuant to the Law on Territories of Accelerated Development, certain territories within the Russian Far East benefit from special regulations incentivizing investment and business operations in the region.
As of October 2015, there are nine territories of accelerated development within the Russian Far East subject to the regulations established by the Law on Territories of Accelerated Development:
- “Khabarovsk” in Khabarovsk region (industry, infrastructure);
- “Komsomolsk” in Khabarovsk region (industry);
- “Nadezhinsky” in Primorsky region (consumer goods manufacturing, food-processing industry, infrastructure);
- “Mikhailovsky” in Primorsky region (livestock breeding, agriculture, food-processing industry);
- “Priamursky” in Amursky region (industry, infrastructure);
- “Belogorsk” in Amursky region (agriculture);
- “Kamchatka” on Kamchatka peninsula (tourism, sea port, agriculture);
- “Beringovsky” on Chukotka peninsula (subsoil use and mining); and
- “Kangalassi” on Sakhalin island (industrial park).
However, there is no established limit on a number of such territories within the Russian Far East, and new areas within the region are likely to gradually become subject to the relevant regulation.
Incentives for territories of accelerated development include:
- duty-free import and re-expatriation of goods and equipment;
- tax holidays and other tax benefits (including limitations on tax inspections);
- simplified procedures for obtaining various permits (including construction permits);
- no quotas for foreign workers and simplified procedures for obtaining work permits; and
- simplified procedures for the lease of state land plots and lower lease rates.
Vehicles for Investment - Sovereign Fund for the Russian Far East
Russian and multinational companies and banks have already formed several investment consortiums with a focus on investment and development of the Russian Far East. In addition, the Russian government has established the Sovereign Fund for the Russian Far East (the “RFE Fund”). The RFE Fund is wholly-owned by the Russian state. Over the past few years the RFE Fund has been gradually increasing its funds and investments. The RFE Fund has 15.5 billion rubles (approximately 240 million US dollars as of 15 October 2015), and will be receiving 78 billion rubles (approximately 1.2 billion US dollars as of 15 October 2015) within the next 10 years through tax increment financing.
The RFE Fund focuses on investment projects that contribute to the development of the Russia Far East and are attractive for investment, such as infrastructure development, production of advanced technology products, agriculture and subsoil use.
The RFE Fund is able to partner with both Russian and foreign investors provided that the project meets the RFE Funds established criteria (such as the goal of the project, required costs and expected rate of return). The RFE Fund has already participated in several projects including the construction of a railway bridge from Russia to China over the Amur River, the construction of roads for gold mines operated by Renova Group and a waste treatment project on Sakhalin Island.