Territories of Advanced Development in the Far East: Topical Issues of Improving Legislation

8 September 2022

Territories of Advanced Development in the Far East: Topical Issues of Improving Legislation

Key conclusions

The government is listening to the business sector’s ideas and requests

“Since it was first adopted, the law on ASEZs has been amended 13 times. These have not been about clearing up details so much as about developing the mechanism on the basis of regulatory enforcement practices, and to a large extent, in line with requests submitted by investors. The current assembly is not yet a year old, but we have amended the law on advanced special economic zones twice since then. So, we are listening to investors,” Nikolay Kharitonov, Chairman of the Committee on the Development of the Far East and Arctic, State Duma of the Federal Assembly of the Russian Federation.

“We are currently working on improving things. We have established multiple institutions to help us keep our finger on the pulse. We are in a constant dialogue with the business sector. I can say that we are moving forward with Delovaya Rossiya (Business Russia) and several associations made up of our residents at the Free Port of Vladivostok and advanced special economic zones. We have also conferred with members of the Primorye branch of Opora Russia. To be honest, this also brought to light the fact that some things had not been finalized at the State Duma. It emerged that we had excluded some important regulations which would enable us to alleviate things for entrepreneurs. We’ve taken note, and will return to the matter presently,” Pavel Volkov, State Secretary – Deputy Minister for the Development of the Russian Far East and Arctic.

“On behalf of the business sector and business associations, I would like to reiterate the fact that we are working together very closely. A whole range of initiatives which were put forward by entrepreneurs and business associations have already been implemented in the regulatory framework, federal laws, and resolutions issued by the Government of the Russian Federation,” Denis Gros, General Director, Operating Company of Avangard Industrial Park; Chairman of the Board of the Union of Residents, Territory of Advanced Social and Economic Development.

“Over the years that I have been in business, we have clearly understood that interaction with government bodies, Pavel [Volkov – ed.], Nikolay [Kharitonov – ed.], and the Far East and Arctic Development Corporation has greatly helped us to move forward. The time needed for some procedures has been dramatically reduced over the past two years,” Svetlana Volobueva, Deputy General Director, Topgan Sports Shooting Club.

Natural hazards need to be assessed when planning projects

“There’s a very good term: long-term forecasts of natural hazards and risks... Entrepreneurs must take account of these forecasts when making long-term plans regarding any kind of economic activity. Then we will be able to avoid hazards related to the permafrost and climate [risks – ed.]. Once we get a request from the business sector, we will be ready to work in cooperation with the Russian Union of Industrialists and Entrepreneurs to make a so‑called forecast, and do an economic and environmental feasibility study so as to avoid any negative impact. But you know, nobody has yet approached us with such a request,” Viktor Usov, Adviser to the Vice President for State and Private Industrial Companies and International Cooperation, Russian Academy of Sciences.

“We really are virtually drowning today: Amur Region has had eight floods in 10 years. This is already a pattern – it’s easier to pick out a year when there was no flooding than when there was. And nobody has made a 30-year or a 50-year long-term forecast. Perhaps it’s not worth establishing things there today, including advanced special economic zones. Federal government bodies probably need to place an order, because no business will pay for it. However, as the government, we need to understand what this entails. We need to resettle people in the right way, and invest funds in the right way,” Ivan Abramov, Deputy Chairman of the Committee on Economic Policy of the Federation Council of the Federal Assembly of the Russian Federation.

PROBLEMS

The reduced insurance contribution rate mechanism is in need of improvement

“Construction has begun on plenty of things at the ASEZ. Essentially, this incentive – the reduced insurance contribution rate – applies from the moment a company obtains the status of resident. However, we don’t actually need this reduced rate. It’s only required from the moment our facility is commissioned... We build the facility over the course of five years, and this reduced rate [is in place – ed.] for five years. What for? The time we need it is from the moment the facility is commissioned, and then it could indeed be in place for five years,” Andrey Grachev, Vice President for Federal and Regional Programs, Norilsk Nickel.

“Insurance contributions are very important. The launch time of some of our projects is indeed three, four, five, or six years. That’s half our 10-year contract period right there. And during the initial period, we don’t have that many employees to whom we could extend this incentive. They all come in later. Meanwhile, most of the time frame we could have used has already passed by,” Svetlana Volobueva, Deputy General Director, Topgan Sports Shooting Club.

“The investor must be the one to determine when the 10-year period begins. I think that the government and the Federation Council will be very happy to support the idea of giving them this right,” Ivan Abramov, Deputy Chairman of the Committee on Economic Policy of the Federation Council of the Federal Assembly of the Russian Federation.

Businesses and investors have a different understanding of how a project should be designed

“It is heartening to hear that our legislative bodies, executive bodies, and colleagues from the Far East and Arctic Development Corporation support our initiatives as part of efforts to shorten the pre-investment phase. It takes us a lot of time to select a plot of land, and it’s great if it’s somewhere that meets our needs. In that case, we immediately begin design and surveying work. If we suddenly find out that nothing quite aligns, we spend a lot of time drawing up a site design and changing the site where the plot of land is. It can range from six months to two years. Later on, we come up against unresolvable problems in the form of monuments of federal significance, or some special regime or another which forbids us from building there. This pre-investment phase is very long,” Svetlana Volobueva, Deputy General Director, Topgan Sports Shooting Club.

“What we find is that there is a lack of understanding about what a project is. Some companies show up with fairly large sets of documents, but more often what they have is a well-developed idea rather than a project. As far as we’re concerned, a project is an idea which has been documented, clearly structured, and broken down into a whole range of components. This encompasses the technical and economic feasibility study. It also encompasses the financial commitments, which factor in all available financial tools offered by the state as well as financial institutions. Then there are the legal commitments... Often we get borrowers coming to our institution for finance spending quite a lot of time preparing documents. They come to us with an incomplete set of documents, and sometimes spend two years either correcting the documents that they have, or drawing up the missing documents,” Vladimir Novikov, Member of the Board of Directors, General Director, VEB Engineering.

Companies occasionally come under excessive pressure from the tax authorities

“We come under so much pressure from the tax authorities. Tax authorities probably pay particular attention to resident companies. However, in signing the contract, we have probably already proven all this responsibility... Nevertheless, the tax authorities haven’t eased off since 2021. For these past two years we have had one tax inspection after another without end. These include on-site inspections, and requirements for submitting documents. We submit documents in electronic form. It’s absolutely clear that we have submitted documents and receipts, and that they were accepted. And then, 10 days later, we get the same demand to submit the exact same documents. One gets the impression that they’re just testing our endurance,” Ludmila Kuznetsova, Shareholder, Komsomolskaya Poultry Farm.

“We need a system in place here as well so as to prohibit systematic on-site inspections. We’ve struggled with these for years now,” Ivan Abramov, Deputy Chairman of the Committee on Economic Policy of the Federation Council of the Federal Assembly of the Russian Federation.

SOLUTIONS

Extending the period that incentives are in place, and offering them in more places

“I would like to highlight regional investment projects. Put simply, businesses are offered tax incentives during the implementation period, and with the money they save they invest in production. Production is expanded, as is the tax base. It’s a win for businesses, and it is a win for the state in the long term. We have seen this in Krasnoyarsk Territory and Murmansk Region... This mechanism is officially in place until 2028. We propose extending it to 2050,” Andrey Grachev, Vice President for Federal and Regional Programs, Norilsk Nickel.

“The incentives and preferences provided by an ASEZ and the Free Port of Vladivostok are an incredibly significant part of the financial model that we are putting in place for projects which we are currently structuring in the Far East. As far as this is concerned, we would like to not only support the initiative to prolong the incentives which are currently available, but also to make preferences available in more areas... We are committed to financing projects that provide a socioeconomic boost for the development of a region, and the country as a whole,” Vladimir Novikov, Member of the Board of Directors, General Director, VEB Engineering.

Territories of Advanced Development in the Far East: Topical Issues of Improving Legislation

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