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Focus on South Korea (Issue 3, 2015)

Russia ratifies the Asian Infrastructure Investment Bank treaty 

President Putin has signed legislation ratifying The Agreement of the Asian Infrastructure Investment Bank, a treaty signed by 57 countries on 29 June 2015 in Beijing, which creates a bank that will finance infrastructure projects and promote the sustainable economic development of the Asian region. 

China, which initiated the treaty, will be the largest stakeholder (26.06%) in the Asian Infrastructure Investment Bank (AIIB), along with India (7.5%) and Russia (5.92%). Russia's participation will help to attract foreign investment, especially in the development of the Russian Far East and Eastern Siberia. The share of Asian countries in the AIIB shall not exceed 75%, with participants from other regions of the world holding the remaining 25%.

State members of the International Bank for Reconstruction and Development and the Asian Development Bank also may become members of the AIIB.

The Russian government sets up two new departments for the development of the Far East 

On 2 September 2015 a federal decree established two new agencies within the Ministry for the Development of the Russian Far East: the Far East Agency for Investment and Export Promotion; and the Agency for the Development of Human Capital in the Far East. This is a continuation of the government initiative, begun in 2014, to create an integrated system to support development in the region.

The agencies will focus on the promotion of investment in the Far Eastern Federal District, not only among foreign investors, but also involving the District’s residents in advancing social and economic development. This will include, for example, local staffing and training assistance for investors entering the region.

The Minister for the Development of the Russian Far East, Alexander Galushka, noted that, consistent with worldwide best practices, the Agency for Investment and Export Promotion will be a service center for investment and maintenance projects.

Far East free ports legislation receives favorable responses 

On 30 November 2015, as a result of discussions at the Public Chamber of the Russian Federation, a draft federal law On the Free Ports of the Far East received generally positive assessment from experts. The legislation is in response to President Putin’s initiative to create four free ports in 14 municipalities of the Kamchatka Region, the Sakhalin Region, Chukotka Autonomous District, and the Khabarovsk Territory, providing legal regimes for the activities of their residents, similar to those in the Free Port of Vladivostok. 

Created by Federal Law 212-FZ On the Free Port of Vladivostok (13 July 2015), the city of Vladivostok has operated a free port since October 2015, with special tax, customs, visa, other benefits and preferences for business and investors. Investors from South Korea have expressed enthusiasm about participating in joint development projects with the Russian Federation in the preferential regimes of free ports. 

At the same time, the Russian government is considering ways to simplify the residency procedures for the free ports. The decree of 20 October 2015, which implemented the Vladivostok free port legislation, set these criteria for free port residency:

  • the existence of registration in the free port of Vladivostok;
  • investments of no less than RUB 5 million during the first three years; and
  • the novelty of an investment project or activity of the candidate.

Alexander Galushka has commented that these criteria might restrict residency status for projects already underway in the Vladivostok Free Port, depending on the volume of investments in business development and tax payments. The Presidential representative in the Far Eastern Federal District, Yuri Trutnev, has placed the simplification of residency criteria on the agenda of the next meeting of the Supervisory Board of the Free Port of Vladivostok. 

A simplified visa regime for the Free Port of Vladivostok also has been approved. From 1 January 2016, an 8-day visa for foreigners who want to enter the free port will be available directly at the border.

Improved joint inspections in Areas of Priority Socio-Economic Development 

Government Decree 1132 of 24 October 2015 introduced a special mechanism for joint planning inspections of residents of Areas of Priority Social and Economic Development (APSED) by authorized state and municipal bodies of supervision or control. 

Joint inspections of the activities of area residents will now be conducted in accordance with the consolidated annual plan. A decision on the need for collaboration in the framework of a routine inspection will take into account:

  • the combination of inspections by type;
  • the number of bodies (no more than five recommended) simultaneously carrying out control or supervision of an APSED resident; and
  • the alignment of inspections conducted separately within the framework of the federal, regional, and municipal control or supervision.

This new mechanism does not apply to the types of controls established by p. 3.1 v. 1 of Federal Law 294-FZ On the Protection of the Rights of Legal Entities and Individual Entrepreneurs in the Exercise of State Control (Supervision) and Municipal Control (26 December 2008), such as: to monitor the implementation of foreign investments in business entities of strategic importance; or state control and supervision of economic concentration, or in the fields of fiscal, tax, currency, customs, and ports.

Attracting investment to the Russian Far East 

In addition to legislative improvements for APSEDs and free ports, the Ministry for the Development of the Russian Far East analyzes the reasonableness of prices and tariffs in order to minimize the transport and energy costs of economic entities operating in the Far Eastern Federal District. The Ministry has expanded the list of investment projects, is recapitalizing the Fund for the Development Fund of the Far East and the Baikal Region, and is extending the regime of privileges and preferences to the new territories. 

For example, the Ministry is considering the possibility of creating new three new APSEDs: "Mountain Air" and "South" on Sakhalin Island; and "Kuril Islands.” These would focus on the development of tourism and agriculture and could include 56 projects worth RUB 27 billion, with private sector investment. By the end of 2016, APSEDs may also be formed in the Jewish Autonomous Region, Khabarovsk Krai, the Primorye Krai. The Primorye APSED would be based on the Zvezda shipbuilding industry and the Eastern Petrochemical Complex, and would include Russkiy Island. 

Alexander Galushka has stated that RUB 13.8 billion will be used to finance projects in the Russian Far East worth more than RUB 128 billion. The Fund for the Development of the Far East and the Baikal Region will fund RUB 4.7 billion of the total cost of RUB 50.3 billion for three transport and infrastructure projects:

  • Eastern Mining Company’s project to construct transport infrastructure to increase coal production at the Solntsevsky mine in the Sakhalin region, with the Fund investing RUB 2.8 billion of the total cost of RUB 45.1 billion;
  • GK Union’s project to construct a “dry port” transport and logistics complex in the Primorsky Krai, with the Fund investing RUB 700 million of the total cost of RUB 1.5; and
  • the Vladivostok Sea Fishing Port project to construct a refrigeration warehouse complex for fishery products in Primorye Krai, with the Fund investing RUB 1.2 billion of the total cost of RUS 1.2 billion.

South Korea and Russia agree to create special channels to support business

During a meeting on 28 October 2015, the Minister of Finance of the Republic of Korea, Choi Kun Hwang, and the Russian Presidential representative in the Far Eastern Federal District, Yuri Trutnev, agreed to form a consultative body to promote the implementation capacity of companies in South Korea in the Far East. 

The coordination of investment activities related to infrastructure development and the use of resources will be the main tasks. The sides emphasized the high potential of economic cooperation in the region in view of the imposition of sanctions by Europe. South Korea and the Russian Federation also will explore and plan possible projects. 

At the meeting of the Joint Commission on Economic and Scientific-Technical Cooperation on 26 October 2015, Russia and South Korea identified priorities for cooperation in agriculture, energy and natural resources development, logistics, industry, and science and technology. South Korean companies have already expressed their intention to become residents of the Vladivostok Free Port.

Aquaculture development in the Far East 

On 19 October 2015 the Presidium of the State Council identified, as one of the government’s priorities for the development of the fishery industry, the need to increase aquaculture in the Far East. Today it contributes only 3.5% of Russia’s total production, despite a high potential for fishing, estimated at three million tons annually. 

According to the Presidential representative in the Far Eastern Federal District, Yuri Trutnev, the APSED experience should be applied to the development of aquaculture. Federal legislation is needed to review current regulations on the creation and use of fishing areas, thereby removing barriers to the use of sea areas for aquaculture. 

The Prime Minister, Dmitry Medvedev, the Ministry for the Development of the Russian Far East, the Ministry of Agriculture, the Federal Agency for Fishery, and other executive bodies are considering issues such as:

  • the order of distribution of investment quotas;
  • increasing the term of the agreement on assignment of catch quotas from 10 to 15 years;
  • increasing the volume of development ranges from 50% to 70%;
  • using a principle of "quotas in exchange for investments" to allocate 20% of the quota allowances to investment in port infrastructure and fishery infrastructure; and
  • requiring fishing companies to extract at least 70% of the catch using vessels that they own or lease.

The Russian government is expected to introduce new federal legislation by 15 February 2016. 

President Vladimir Putin has observed that the allocation of catch quotas to stimulate investment activity will also contribute to the development of fishery-related. There is strong demand in the fishing industry to replenish the fleet with new vessels, which will stimulate shipbuilding in private shipyards. 

Prime Minister Medvedev has also advocated the creation of fish-processing clusters in the Russian Far East, as part of a unified coordination system for fisheries, similar to the one proposed for forest resources in the Far East, which comprise 20% of Russia’s total forests. These regimes would include benefits such as preferential duties and the implementation of investment agreements without auctions. These changes should also improve access to the waters and land in the region, simplify tax and tariff regulations, and protect the property rights of entrepreneurs through the use of public-private partnerships.

Cooperation in agriculture 

On 23 November 2015 Minister for Development of the Russian Far East Alexander Galushka and Minister of Agriculture, Livestock and Food Industry of the Republic of Korea, Lee Dong-Phil, discussed key areas of cooperation in financing the agricultural sector in the Far East. 

As Galushka noted, the implementation of investment projects in the two APSEDs ("Belogorsk" and "Michailovsky"), and the focus of "Khabarovsk" and "Kamchatka" APSEDs on agricultural activity, are evidence of the investment attractiveness of the region. 

As a result of initiatives such as the Eastern Economic Forum. investment projects in agriculture amounting to RUB 206 billion are under consideration. Lee Dong-Phil also mentioned the positive experiences of South Korean investors in a number of projects in the Russian Far East, and he expressed readiness for further partnership.

"Opening" the Far East to foreign medicine 

On 22 October 2015, Minister for the Development of the Russian Far East, Alexander Galushka, and Minister of Health and Welfare of the Republic of Korea, Doc Kwang Chol, met in Seoul to address issues of health services in the Far East. These included cooperation in medical investment projects and an international medical cluster in the Free Port of Vladivostok. The Russian government has prepared legislation to include the activities of foreign medical organizations, which has received high praise from the Korean side. 

Russia and South Korea will establish an ad hoc working group on medical activities in the Vladivostok Free Port.