The Russian government's New Year's resolution: Starting January 1, 2017 the purchase of Russian goods and services will have priority over those of foreign origin
Paul Goncharoff is Chairman, Disciplinary Committee, National Association of Corporate Directors, Russia
While President-Elect Donald Trump was actively engaging with Carrier and other companies to encourage keeping America’s business and jobs in America, Russia was also quietly supporting jobs and manufacturing to enhance “made in Russia”. Russian origin goods and services will now have priority, wait for it… In Russia!
Starting this past New Year’s Day, January 1 2017 the purchase of Russian goods and services will have priority over those of foreign origin in accordance with Russian Government Decree No. 925 dated 16 September 2016. Sanctions were the stimulus, but common business sense was the driver. The new decree applies to all suppliers selling goods and services to state corporations, natural monopolies, as well as companies in which the Russian state has at least a 50% interest. All types of procurements are affected, as the Decree does not restrict its application to any specific goods or services.
The Decree places foreign goods, and services suppliers at disadvantage when compared to Russian suppliers in some key respects:
At the selection stage, Russian Local Suppliers will benefit from a 15% virtual discount from the prices specified in their ‘Made in Russia’ offers.
Goods are considered to be of Russian origin, if they are made or have been sufficiently processed in country according to customs regulations that are applicable in Russia. A supplier is considered Russian if it is a legal entity registered in Russia (which can be fully foreign-owned, except in cases of specifically regulated sectors, such as media) or a Russian citizen.
Where the priority preference rule does not apply are in the following circumstances:
– If only a single bidder took part in the tender;
– If only foreign-made goods were offered; or
– If purchases are made from a supplier who enjoys an official “sole supplier” status.
The way companies might achieve sole supplier status, or have their goods recognized as locally produced is defined under the rules on procurement of goods, works and services for state needs (Federal Law No. 44-FZ dated 5 April 2013). To enter into a special investment contract under which they make a firm commitment to establish or expand their production in Russia in exchange for state guarantees and tax incentives.
To date, only four such contracts have been signed, including a contract for enlarging a machinery plant signed at the Sochi International Investment Forum on 30 September 2016. Similar contracts have been concluded recently by major global producers of agricultural machinery and cars. Today several large manufacturers of cars, electrical goods, and agricultural machinery have reportedly initiated negotiations to conclude such contracts.
Introduction of this procurement priority rule is to encourage foreign manufacturers to localize their production in Russia, take advantage of low ruble costs, enhance job creation, and provide needed competition between similar providers of goods and services both domestic and foreign.
Those goods, which are so far not manufactured in Russia, will be unaffected, but it does allow companies that have taken the decision and worked to establish full operations in Russia a clear advantage. Already, according to OPKO Russian Market Partners there has been a noticeable growth of inquiries since November 2016 by an array of Asian, Latin American, US and European businesses interested in operational due diligence studies concerned with registering and setting up various production operations inside Russia. This should also usher in a new growth phase in Russia’s economic development which hopefully will finally put to rest the largely unfounded fear and risk of doing business in and with Russia as this has been blown out of all proportion to the realities on the ground.
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