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Newsletter for South Korean businesses and investors (Issue 1, 2015)

Far East Economic Forum scheduled for 12-15 August 2015 in Vladivostok

On 5 March 2015, Russian President Vladimir Putin confirmed 12-15 August 2015 for the Far East Economic Federal District (FEEFD) Forum in Vladivostok.  The event is expected to attract a lot of attention, especially from the Asian-Pacific region. The main theme will be the development of the FEEFD, and it will focus on areas of priority social and economic development, as well as new projects such as the creation of the free port in Vladivostok and Northern Sea Route.

Areas of Priority Social and Economic Development effective on 30 March 2015

On 29 December 2014, President Putin signed Federal Law 473-FZ relating to Areas of Priority Social and Economic Development (APSED) in Russia, which provides a legal basis for entrepreneurship and other investment activities to make a positive impact for social and economic development of particular areas of Russia. The legislation addresses subjects such as:

  • Types and legal status of economic activities
  • Minimal capital assets and technical requirements for APSED residents
  • Imposition or non-imposition of custom duties of the duty-free zone
  • Description of the APSED boundaries
  • Equipment and production methods for the relevant economic activities, if necessary

An APSED is created for 70 years in the territory of a municipality or several municipalities within a single territorial division of Russia. An APSED may not be established in a Special Economic Zone [note 1] or a designated “area of the territorial development." [note 2].  Likewise these two areas may not be included in an APSED.

During the first three years, APSEDs may be located only in the Far East Economic Federal District, as well as metropolitan cities designated by the Russian Federation as having complicated social and economic situations. After the first three years, APSEDs may be established elsewhere.

APSED residents conducting business and other activities will enjoy benefits of a special legal and regulatory regime, including:

  • preferential rental rates for the use of real estate;
  • preferential taxation, such as:

            -  a zero tax rate subject to the Federal budget

            -  a reduced tax rate on income on residents of APSED

            -  exemption from taxes on land and corporate property

  • Reduced tariffs on insurance payments
  • Special employment rules for APSED residents, including foreigners
  • Special rules for municipal government and state control of APSED residents and their activities
  • Priority connection for APSED infrastructure objects
  • Introduction of free economic zone procedures

Chapter 8 of the law focuses on the creation and operation of institutes of development for the Far East.  Advanced social and economic development will encourage investment in construction of new production plants in the Far East Federal district, as well as the modernization of existing ones.

Russian Federation approves the APSEDs in the Far East

On 12 February 2015 the Russian Federation approved several investment projects in the Far East Economic Federal District (FEEFD).  Since then, three applications for APSED residency have been filed with a committee that includes: the Minister of the Russian Federation for the Development of the Russian Far East, Alexander Galushka; the authorized representative of the President of the Russian Federation in the Far Eastern Federal District, Yury Trutnev; other representatives of the Ministry and management of the FEEFD; and prospective investors.   

The main criteria for pre-qualification were the confirmed demand by investors for realization of projects and the presentation of infrastructure solutions. From 17 applications, three APSEDs were selected:  Khabarovsk APSED, Komsomolsk APSED (Khabarovsk krai), and Nadezhdinskaya APSED (Primorsky krai).

Other applications will be processed and coordinated with the territorial entities of the FEEFD and the Ministry. 

Other investment projects in the Far East were considered.

Previously, the Ministry for the Development of the Russian Far East processed 39 applications with combined investments of RUB 1.5 trillion. Seven projects were forwarded for subcommittee consideration, six of which were processed, and one excluded because of investor default.  The total amount of private investments for the six projects forwarded is RUB 126.54 billion, more than 40 %  -- RUB 52.03 billion -- of which are realized. Public investment would be RUB 16.5 billion. 

The Ministry for the Development of the Russian Far East has stated that the above-mentioned projects are planned to be created through the participation of Russia, North Korea, and South Korea.

Free port status for Vladivostok under consideration

In accordance with President Putin’s State of the Nation address on 4 December 2014, public discussion has begun regarding a proposed Federal law to assign free port status to Vladivostok, and will continue through 18 March 2015.

This would be a 70-year project, and might last much longer.  The port of Vladivostok would become a free trade zone, comprising seven municipalities in the Primorye territory: Artemovsky, Vladivostok, Nadezdinsk, the Schcotovsky municipal entities, Partizansk, Pogranichny and the Hasansky districts.

Four special zones would be created: portal; industrial; scientific and innovation; and tourism and recreation. Residents of the free port of the Vladivostok would receive federal tax and insurance benefits, and would also enjoy a special tax regime and procedures for free custom zones, arranged in accordance with the current law.

Any legal entity or individual entrepreneur would be able to obtain residence by applying to the "management company" [note 3] of the APSED, in order to commit to an agreement. Applicants would be required to specify

  • a specific zone for the location of the business
  • the space and infrastructure requirements of the business
  • the preferred term of the agreement
  • a business plan submitted for approval

Under the law, the managing company would be required to respond to applications within 15 days.

RusHydro and K-Water agree to work together in environment-related activities

At the end of the January 2015, RusHydro JSC and K-Water signed a memorandum of understanding to research mutually-beneficial joint activities in the fields of renewable energy, hydropower, water treatment, wastewater processing, and environmental-impact solutions in Russia, South Korea and other countries.  A yet-to-be-established working group will decide among the potential joint activities and projects for the construction and operation of energy facilities, parameters of joint participation in such projects, and funding.  The agreement is for two years, with the possibility of extension.

Lotte Holdings to invest in the Russian Federation

Shin Dong Bin, the Chairman of the Board of the Korean multinational group, Lotte Holdings Co., Ltd., has announced that Lotte will invest more than USD 1 billion in the Russian Federation over the next three years and will become the biggest Korean investor in Russia. 

In 2017, the Lotte Group plans to open 5-star Lotte Hotels in Saint Petersburg and to invest USD 140 million. Lotte also is in negotiations about the opening of two other hotels in Russia and the purchase of the Atrium trade center in Moscow.

Russia and South Korea plan working group to increase shipbuilding capacity

Rosneft JSC wants to create a working group with South Korea's leading shipbuilding company, Daewoo Shipbuilding & Marine Engineering Co. The group would devise a road map to increase the shipbuilding capacity of the Russian enterprise, Zvezda.  Construction of a new shipyard that would build tankers, ships with ice lining, and elements of the maritime platform for shelf production, is in the planning stage. 

Plans for the shipyard were initiated last year during a visit by President Putin to South Korea.  A memorandum of cooperation was entered into between Rosneft JSC and Daewoo Shipping Co.; and based on that memorandum, Rosneft claimed RUB 400 billion from the Russian government, in particular from the National Welfare Fund, to support construction of the shipyard in the Far East Economic Federal District.

Notes

[1] A Special Economic Zone is an area in the Russian Federation that has been authorized to operate special modes of doing business.  It also uses the customs procedures of a free customs zone.  Federal Law 116-FZ, On special economic zones in the Russian Federation (22 July 2005)

[2] An “area of territorial development” is an area in which the socio-economic development accelerates through the formation of favorable conditions and state support for attracting investments. Federal Law 392-FZ, On areas of territorial development in the Russian Federation and on Amendments to Certain Legislative Acts of the Russian Federation (12 March 2011)

[3] The “management company” is the joint stock company defined by the Government of the Russian Federation in order to implement the management functions of the APSED and the companies that are 100% state owned or are a subsidiaries created with the participation of a state owned company.