Russia’s New Advanced Development Territories Law: Far East Focus

An initiative to spur investment in this underdeveloped region.

Amid the ongoing loud noise surrounding the situation in Ukraine (and in Syria) and the related sanctions and counter-sanctions, a new Russian development initiative seems to have slipped under the radar. But it is worthy of note—particularly for potential investors in Russia’s Far East. This has all the more potential importance in the context of Russia’s recent pronounced political and economic pivot toward Asia. The Law on Advanced Development Territories (the ADT Law, or the Law), enacted in December 2014 and entered into force in spring 2015 (and the related simultaneously adopted acts that make corresponding amendments to the Tax Code and some 20 other laws) set out the “rules of the road” for these ADTs.

Russian President Vladimir Putin and other top officials at the Eastern Economic Forum in Vladivostok in September spotlighted this ADT program prominently. A number of new projects were announced at that forum or earlier, and most recently at an international forum in Harbin, China.

In a separate related development, in July, a so-called “Free Port of Vladivostok” was established within Vladivostok city and a few neighboring municipalities – which provides benefits and incentives to investors similar to the ADT Law, and with an enhanced exemption regime for customs clearance and immigration. The fiscal benefits of the Vladivostok free port come into force in January 2016, but a major Korean conglomerate is reported to be eyeing this opportunity.

Background

The ADT regime is somewhat similar to Russia’s existing Special Economic Zones (SEZ), which came into being under the 2005 Law on SEZs and some earlier regulations. These programs have had only mixed success. But the central focus of the new ADT regime is different: while SEZs have been aimed primarily at spearheading various industries (such as innovative technologies, ports, or recreational complexes), the ADTs are to address the general unevenness in development across Russia’s vast territory by incentivizing investment in more depressed areas—starting with the underpopulated and relatively neglected Far East.

As initially drafted, the ADT Law was to be confined to the Far Eastern Federal District alone. This geographical limit no longer applies so generally under the Law as enacted. But for the first three years, under special transitional provisions, it will apply only in the Far East and in certain sole-core-employer cities “where the social and economic situation is particularly drastic.”

The Law further directs the government to appoint a special authorized body (AB) charged with various ADT supervisory and planning functions. So far only the new Ministry of Eastern Development (established in 2012) has been appointed as such an AB—for the Far Eastern Federal District. For all practical purposes the Law will apply essentially in the Far East, at least initially. The Ministry has already adopted various implementing regulations envisaged under the Law. Further, Deputy Prime Minister Yury Trutnev, who is also the president’s plenipotentiary in the Far Eastern Federal District, has pledged strong support for the ADT program alongside other measures for development of Russia’s Far East.

As of September, the government has already approved the establishment of nine ADTs, including Komsomolsk (in the Khabarovsky Krai), Khabarovsk (covering several districts within Khabarovsk City and elsewhere), Nadezhdinskaya (in the Primorsky Krai), and some others in Kamchatka, Yakutia, and Amurskaya Oblast. The first specific ADT projects announced at the Vladivostok Forum and on other occasions (taking into account the most recent Harbin EXPO) include the following:

• Construction of a bitumen plant by a Chinese-owned Singapore company together with Russia’s Independent Petroleum Co. (NNK) in the Khabarovsk ADT
• An Australian coal company’s proposed investment into the transport infrastructure of the Beringovsky ADT in Chukotka
• Recreational infrastructure facilities (including a golf club) to be financed and constructed by a Japanese company in Vladivostok
• A proposed major agricultural enterprise investment by Russian interests at Mikhailovsky ADT in Primorsky Krai (the precise location is not yet identified)
• German investors’ readiness to provide some 20 billion rubles to the Kamchatka ADT
• A planned 50 billion rubles investment for infrastructure development in the Primorsky ADT
• A coal-loading terminal to be constructed by Sakhatrans in Khabarovsky Krai (estimated investment of 30 billion rubles)
• A truck-building plant (and dealership and service centers) project to be undertaken together by Chinese Sinotruk and the Far-Eastern Road and Construction Company in the Komsomolsk ADT

Government Decree

Under the Law, an ADT is created by a government decree for a term of 70 years. Such decrees are based on a proposal by the Authorized Body. This proposal, in turn, is supposed to be based on preliminary agreements with one or more prospective investors into the planned ADT. A special federal government commission will also play a role in ADT selection and formation.

The relevant government decree will set out the main ADT parameters, including its territorial limits (no overlap with an SEZ is allowed), types of commercial activities eligible for benefits to ADT residents (in contrast to SEZs, there are no economic sector limits for such activities are established in the Law), minimum investment and technology requirements, and a few other aspects. These decrees presumably will take into account the preliminary agreements with prospective investors mentioned above.

Tripartite Agreement

After the base government decree is adopted, the AB (again, for practical purposes, this is the Ministry of Eastern Development for now) and the relevant regional and municipal authorities are to enter into a tri-partite agreement to regulate various obligations and procedures for the ADT in question. This includes the regional and municipal authorities’ obligations on transferring of land plots and facilities into ownership by or lease to the management company (see immediately below on this point) or granting the management company the authority to manage such land plots and facilities, financing and operation of the infrastructure facilities, the conditions for granting property and land tax holidays to ADT residents (see more on tax and other exemptions below), and other aspects.

Management Company

An important player in an ADT’s actual functioning is its management company (MC). Under the Law, an MC is a 100% federally owned joint stock company that is designated as such by the government. An MC will have a broad range of powers, authority, and functions for its ADT(s). For example, an MC will (itself or by delegation to a subsidiary) do the following:

• Act as an infrastructure construction customer (in Russian, zastroischik)
• Ensure or organize the functioning of the ADT infrastructure
• Take ownership or lease of federally or municipally owned land plots, buildings, and various infrastructure facilities (on certain conditions)
• Facilitate connection into the utilities networks for ADT residents and service providers
• Draft proposals for relevant amendments to municipal and other zoning plans
• Organize the construction of roads and installation of infrastructure facilities
• Provide various services to ADT residents

The government has already appointed a joint stock company Korporatiya Razvitiya Dalnego Vostoka (in English, Far East Development Corp.) as such an MC—again, with respect to the whole Far East District.

ADT “Residents”

To become an ADT resident, a commercial company (or individual entrepreneur) needs to file an application with the MC that includes a business plan and proposal for the types of activities to be performed and the level of investments and then enter into an activities performance agreement with the MC reflecting the investment obligations as well as the MC’s obligations. The Ministry of Eastern Development in its capacity as AB has already approved a template of such agreement following the ADT Law guidelines. Per the Law, once an ADT is established and running, there are limits to the grounds for an MC to reject an application and refuse to enter into a contract with a potential resident. The main (and quite general) recognized ground is inconsistency between the applicant’s proposal and the ADT’s particular parameters. It remains to be seen how the activity agreements will be negotiated in practice, as more experience is gathered for substantial new proposed investments.

ADT residents will be incentivized by an array of fiscal and administrative measures, including the following:

• Exemption from or reduction of taxes on corporate profit, mineral extraction, and property and land
• Customs free zone (if approved by the decree enacting the ADT)
• Reduction of Social Security payments
• A system of special protections and guarantees regarding state supervision (only “joint inspections” by various authorities, to be conducted per a schedule approved by the AB, etc.)
• Exemption from foreign employee quota (if approved by the ADT’s supervisory council)
• Reduction of educational and medical care administrative burdens (including admission of foreign-trained doctors and use of best foreign educational methods)

Some of these incentives are fairly similar to those applied to SEZs, including tax and customs holidays and state-inspection limitations.

Conclusion

The new ADT Law appears to open real new investment opportunities, primarily in the Far East. Yet one should be mindful of various restrictions in using this Law’s benefits—including that the potential resident has to be registered within the ADT territory and, if it is a commercial company, it may not have branches or other subdivisions outside of the ADT  (sister companies are permitted). More preconditions apply to the associated tax benefits under the revised Tax Code. Time will tell how effective the ADT Law will be in attracting much-needed new investment to Russia’s Far East.

Article By Jonathan H. Hines & Alexander V. Marchenko of Morgan, Lewis & Bockius LLP
Copyright © 2015 by Morgan, Lewis & Bockius LLP. All Rights Reserved.