Vladislav Borodulin

SEZ law overview

The new legislation provides for a new method of creating “free zones” in post-Communist Russia and limits the possibility of abusing this mechanism. First, the new legislation establishes uniform conditions for Special Economic Zones (SEZ), i.e. it prohibits “direct negotiations” with regional authorities and interested businesses on the creation of a special zone. Second, the law has introduced a competitive procedure for the selection of SEZs. Regional and municipal authorities wishing to establish a SEZ must display material interest in creating such a zone by allocating financial resources for the development of adequate infrastructure. Third, the initiative has done away with most other so-called “special economic zones” that arose throughout the 1990s, except for those SEZs operating effectively in the Kaliningrad and the Magadan regions. Fourth, the new zones should be better positioned to attract investment in new technologies and to facilitate the diversification of the economy. They cannot be set up simply to address the problems of regional inequality or economic backwardness.

Types of special economic zones

From over 70 proposals submitted for the establishment of SEZ in the initial competition, the Russian government has chosen two industrial zones (to be established in the Lipetsk region and Tatarstan’s Yelabuga) and four innovative zones (Zelenograd, St. Peresburg, Dubna, and Tomsk).

Zelenograd – micro and nanoelectronic products

The town of Zelenograd, located 37 km outside of Moscow with the population of 215 thousand people, was founded in 1958 as a center for the Soviet electronics industry. Today, Zelenograd has many research centers and institutes. The SEZ will focus on producing micro and nano electronics, optoelectronics, information and communication systems, bio-information and biosensor technologies, nano technologies and nano materials. The first resident companies at the SEZ include Zelenograd Innovation and Technology Center (ZITC) and Alfachip. ZITC has set up research facilities on the campus of the Moscow State Institute of Electronic Engineering to conduct research on the production of optical equipment. Alfachip develops super scale integration circuits to be used in modern electronics, computer equipment, communication, and household appliances.

Dubna – information and nuclear physics technologies

The town of Dubna is located 125 km north of Moscow and has a population of 67.8 thousand. Its first innovation activities began after World War II, when research laboratories were set up in Dubna to study nuclear reactions. In 1956, a Unified Center for Nuclear Research came into existence. Although Dubna has traditionally been heavily involved in defense sector projects, it started to pursue the development of small and medium-size businesses over the past decade. The Dubna SEZ will focus on information and nuclear technologies. It will house the largest computer center in Russia. Luksoft-Dubna and Dubna-Systema are the first resident companies. Luksoft-Dubna will offer IT outsourcing for Russian, U.S., and EU companies including Boeing and Motorola. Dubna-Systema will specialize in the development of ionic-plasma technologies, as well as pioneer the introduction of nano technologies in new materials manufacturing.

Lipetsk region – household electronics

Lipetsk is a regional center located 508 km to the south of Moscow at the intersection of important transportation lines that connect Moscow with the Northern Caucasus and Russia’s western part with its Volga regions. The region’s territory is 8 thousand square miles and the population is 1.19 million (67% urban and 33% rural). A major industrial area of Central Russia, the city stands out for its scientific, technical, and industrial achievements. Lipetsk is considered one of the most advanced regions in Russia and boasts an “above average” rating by the Ministry of Economic Development and Trade with regard to economic and social performance. The region has a favorable investment climate and ranks 22nd in investment risks among the regions of Russia. Five industries – ferrous metallurgy, machine building and metalworking, food industry, electric power engineering, and construction metals industry – have made the biggest contribution to the industrial advancement of the region in recent years.

The Lipetsk region imports products of machine-building and petrochemical industries, foods, and metals. The SEZ will support manufacturing for a wide range of products by domestic and foreign companies. It is expected that 19 businesses will be established in the zone by the end of 2008. Several foreign companies have already volunteered to be the main residents of the zone, including Italian Verniglass (glassware) and Indesit Compani (washing machines); Swedish Electrolux (washing machines); Dutch Akzo Nobel (pharmaceuticals, coatings and chemicals); German Bosch und Siemens (car spare parts, household appliances, security systems, and industrial equipment), Finnish Sisu Diesel (engines), and others.

St. Petersburg – hi-tech production

St. Petersburg is Russia’s northern capital – a major industrial, scientific, innovational, logistics and cultural center – located on the Eastern shore of the Baltic Sea. The population is 4.6 million (3.2% of Russia’s population) and the total area is 540 square miles. The SEZ will focus on making precision and analytical measuring instruments, medical equipment, software products, electronics and communications equipment, biotechnologies, and new materials. These projects will be pursued in cooperation with the Russian Academy of Sciences. Initial residents will include ZAO Transas and ZAO Transas Technologies. These Russian companies hold leadership positions in the development of on-board radio and electronic equipment for aircrafts and helicopters.

Elabuga region, republic of Tatarstan – cars and automotive parts, petrochemistry

The republic of Tatarstan lies in central Russia and covers an area of 26 254 thousand square miles with a population of 3.77 million inhabitants. The republic of Tatarstan is generally considered to be one of the most investment-attractive regions of Russia. The industrial manufacturing zone in Elabuga will focus on manufacturing auto components, chemical products, and household appliances. A wide range of countries have expressed interest in setting up facilities there, including the U.S. (NALCO), South Korea, Austria, Germany, Switzerland, Belarus, Turkey, Luxemburg, and Slovenia. The Russian company SeverStal Auto – Elabuga, in cooperation with FIAT, is planning to manufacture commercial vehicles and auto parts representing a 4.4 billion rouble (USD 165 million) investment that could create 1 700 jobs. In addition, the plant is projected to have a maximum manufacturing capacity of 100 000 diesel engines per year.

Tomsk – new materials

The Tomsk region is located in southwestern Siberia and has an area of 122 square miles with the population of 1 million inhabitants. The city of Tomsk is the only Russian site east of the Ural Mountains to be chosen as a SEZ site. Despite its remoteness, Tomsk offers good prospects for foreign investors seeking to develop promising innovative technologies. With its universities, traditionally rated among the best in Russia, Tomsk has a well-educated workforce. More than 3 500 experts in electronics, IT, control systems, chemistry, biotechnology, and medicine graduate each year. About 80 innovation-oriented companies, seeking to utilize the potential of Siberian universities, have already applied for resident status in the zone. The Tomsk SEZ will focus on developing IT, telecommunications, electronics, biotechnologies, nano technologies, and new materials. “Sibur-Tomskneftehim” is the first resident company established in the zone. This project combines the efforts of OOO “Tomskneftehim”, OAO “Sibur” with the Institute of Catalytics of the Siberian branch of the Russian Academy of Sciences. The project will help manufacture Russia’s super molecular polyethylene and titanium-magnesium catalysts to be used in a wide range of industries.

SEZ benefits and conditions

Businesses operating in industrial zones (resident enterprises) will be entitled to accelerated procedures for reimbursement of R&D costs, a lift of restrictions on transferring losses to subsequent taxation terms, and a rapid depreciation of fixed assets. Businesses operating in innovative zones will enjoy a reduced unified social tax rate (14%). In addition, property and land taxes will not be payable during the first five years. The SEZ will also be placed under a free customs regime: foreign products can be brought to a SEZ without paying customs duties and VAT. Foreign and domestic products can be transported from a SEZ to other Russian regions without paying customs duties (except for excisable goods). However, residents will have to pay import and export duties if they transport foreign and domestic products from a SEZ to destinations outside of Russia.

There will also be a considerable reduction of administrative barriers.

Special economic zones will be managed directly by the federal government, which will issue permits and perform administrative duties on behalf of all government agencies. This will help avoid bureaucracy and make licensing and certification procedures less time-consuming. The area to be allocated for industrial zones will cover no more than 8 square miles.

Innovative zones will cover a maximum area of 500 acres. The zones may not be used to extract minerals or to set up metallurgic manufacturing facilities inside the zones. Processing minerals and scrap of ferrous and non-ferrous metals in the zones is not authorized. Other activities that are not permitted include manufacturing and processing of excisable products (except for cars and motorcycles).

Industrial zones require Russian and foreign companies to invest at least 10 million Euros (USD 11.72 million) to become an official resident entitled to tax and customs privileges (1 million Euros – during the first year). Businesses operating in innovative zones are not required to meet an investment target. Both types of zones will operate for only 20 years.

High-tech parks

The Russian government plans to create five high-tech parks that will support innovative entrepreneurship in five promising Russian regions. These regions did not win the SEZ contest for industrial and innovative zones, but are still considered to have significant scientific and technical potential. They include Novosibirsk (information and biotechnologies), Tyumen (technologies for the extraction and processing of hydrogen), Kazan (technologies for chemical and petrochemical production), Nizhni Novgorod (information, energy technologies, environmental protection, and medical equipment) and Obninsk (biotechnologies, pharmacology, and new materials). These high-tech parks will serve as incubators for “growing” future resident enterprises and will increase the chances of these territories to win SEZ contests in the future. Unlike SEZs, the high-tech parks will not offer tax and customs benefits to their resident enterprises. At the same time, the Russian government plans to allocate USD 70 million for the parks’ infrastructure development in order to facilitate the economic growth of residing enterprises.

Tourist and recreation zones

On June 3, 2006, the federal law on special economic zones was amended to include tourist and recreation zones to stimulate and develop Russia’s recreational centers and to attract foreign tourists. Such zones will house hotels and health centers, develop hiking and skiing routes, as well as mineral springs, curative mud deposits, and other health-related natural resources.

Potential sites for tourist and recreation zones are Lake Baikal, the Black Sea shore, the republic of Karelia, the Krasnodar region, the Kaluzhskaya, and the Vologodskaya regions. These SEZs will offer a 14% reduction of the unified social tax and abolish a 30% limit on the transfer of losses to the next tax term. They will also relieve investors of property and land taxes for five years. Unlike industrial manufacturing zones, the new SEZs will permit housing construction.

Port zones

In addition, three to five special port zones may be created in Russia. The goals are to build a new port infrastructure, upgrade old facilities, introduce customs-free import regime, and develop port services. The north port of Murmansk is an example of Russia’s seaports in dire need of modernization. The governor of the Murmansk region has estimated that a developed infrastructure would help transport companies to save 3 or 4 days and “millions of dollars per tanker.” Port zones are expected to have the most stringent requirements for investors, compared to other types of zones. The minimum investment target for seaports is 250 million Euros (USD 320 million). A new cargo terminal or airport investment target is 50 million Euros (USD 64 million), while projects for the modernization of an existing cargo terminal must exceed 10 million Euros (USD 12 million).

Resources and key contacts

The Federal Agency for SEZ Management has been set up to manage and monitor special economic zones. The agency assigns a support team of 10-15 specialists to each SEZ. Additionally, the federal agency helps each SEZ form a Supervisory Board, consisting of the representatives of local authorities, trade chambers and the SEZ resident enterprises. It will also make a hotline available to allow future investors to report any possible abuse of authority on the part of local governments or other violators. The Russian Federal Agency for Management of Special Economic Zones maintains a website in Russian at: http://rosoez.economy.gov.ru.

Contact person: Vladislav Borodulin, Commercial Specialist. FSC maintains close contacts at the Federal Agency for Management of Special Economic Zones and can assist in arranging informational meetings and site visits for interested U.S. firms.