Government Support for Russian Business
The task of raising investment attractiveness of the country today is one of the central tasks for the economic section of the Russian government. What government support measures are available to businesses, what are primary support recipients, how are foreign investors feeling and how can one find his way around multiple government support tools are the issues we discuss with Alisa Melkonian, Kept tax and legal consulting department partner.

How attractive, in your opinion, are government support measures for investors in Russia?

Overall, there is a broad range of government support measures for investments in place for raising foreign investments into Russia and stimulating Russian exports. The business community is calling for expansion of such measures, and the process is ongoing. The volume of measures, targeting achievement of various objectives, including investment project support, small and medium business support, development of specific industries (manufacturing, agriculture, innovative technologies etc.).

There is an extensive list of government support measures for investment projects: special investment contracts (SIC), investment protection and promotion agreements (IPPA), public-private partnership (PPP), concession agreements, regional investment project (RIP), investment tax credit (ITC), priority development areas (PDA), special economic zones (SEZ), concessional financing programs etc. These have been widely used and are being actively used by foreign investors, among others. It is a different matter that the demand for these measures varies depending on investor category. For example, European investors now find it harder to use some state support measures and preferential conditions.

What are these, potential PDAs and government support “users” in Russia today?

Those investors from European countries that continue to operate in Russia, obviously have limited options for large capital investment. For this reason, the range of available government support measures is narrow, because many measures establish a high “entry barrier”. At the same time production facilities still require upgrading in order to keep stable operations and to support employment levels. For these investors it is necessary to expand the existing tools to support selective investments – for example, ITC. It also makes good sense to introduce tools, aimed at supporting employment levels, salary levels, stimulating development of Russian technologies, research and development, where use rights would not depend on the amount of capital investments made.

There is a new “layer” of investors from friendly countries like China, Turkey. We observe greater interest in projects in Russia and high demand for state support. Investors are actively seeking all state support measures, both tax and nontax ones.

And apparently, the key users of government support tools are Russian PDAs. Today, especially after the return of some of the capitals back into the country, Russia is implementing a lot of projects in various sectors – in manufacturing, extraction/processing of mineral resources, and in tourism too, with rather high capital investment volumes.

How could efficiency of an investment project could be raised with government support measures?

Each project requires a proper “puzzle” built from various tools. Legal regulations for all these measures are quite complex.

On the whole, all Russian government support measures could be broken down into 4 major categories: preferential tax regimes (RIP, regional preferences, ITC), direct fiscal support (subsidies and grants), concessional financing and the so-called “umbrella” regimes – SIC, IPPA and various PPP forms.

Many instruments are mutually exclusive, meaning they cannot be combined. Nevertheless, a situation where concessional financing could be made available by the Industry Development Fund, a Regional Investment Project status could be awarded to get income tax relief and a regional R&D subsidy, is quite possible.

But, considering the huge number of restrictions, legal and economic reviews of combinability of these measures, feasibility studies and selection of the most effective set of measures are necessary. Supporting such projects, we provide valuable insights in these areas.

What is the role of regions in development of support measures? 

An important selection criterion would be adaptability of regional laws for implementation of federal preferences. When we manage the so-called “site selection”, choosing a site for plant construction, we perform analysis of available regional support measures.

Sometimes territorial “attachment” makes it harder for investors to get support. We see real issues of investors, implementing logistics and transportation projects, with identifying available support measures, when investment projects are carried out in those territories which still do not have any preferential regimes in place. Such government support measures should be more universal, meaning unattached to specific territories. Otherwise, prior to start of a project investors have to go through a lengthy approval process with regional and federal authorities in order to establish such a territory.

How can the existing measures be improved and made more effective? What does the business think about it?

Over the latest years the share of government support measures, based on regulatory approval, has been growing. On the one hand, this improves opportunities for higher predictability of government preferences provided to PDAs. On the other hand, it is required to make contracts with federal or regional authorities. This is either impossible due to the sanctions regime, or is very hard due to lengthy and non-transparent processes.

For instance, to make a SIC 2.0 it is required first to go through a procedure for inclusion of a production technology into s special list, and this list is updated only once in six months (with the latest update happening 9 months after the previous one), and then to go through a tendering procedure, which in real life takes 4-6 months.

Some government support tools (for instance, RIP, ITC) are rather sought after by the business, but these have limited duration and expire in several years. We think these tools need to be extended.

There is yet another case – individual subsidy programs stipulate long-term liability of investors (for several years), and at the same time government obligations to provide long-term subsidies cannot be fixed for long term. Given fiscal legislation specifics, subsidy allocation decisions are made for each month / quarter / year (depending on a program), and in this regard an investor cannot be sure of getting a subsidy in the next period.

Nevertheless, many investors are eager to put efforts and resources into preparation of documents and to go through any required tendering procedures in order to get access to preferences, subsidies and financing, especially when a significant financial impact is expected.

By all means, given currency volatility, expensive logistics, target market uncertainties, any cash flow optimization is essential. Any form of government support could provide for such optimization.