Despite the sanctions and the withdrawal of many foreign companies from the Russian market in January-September 2022, investment activity in the country has increased by 5.9% year on year, according to the Central Bank. Moreover, in 2023, 26% of Russian companies plan to boost their investment activity. Among the growth drivers are the need to transform economic ties and technological processes and the launch of new production facilities as part of import substitution. The trend is also supported by the federal and regional state support measures. Artem Genkin, President of the NPO Center for Protection of Bank Clients and Investors, member of the Council on Financial, Industrial and Investment Policy at the Russian Chamber of Commerce and Industry, spoke in detail about the main institutes and areas of protecting private investment at a session of the Russia – Islamic World: KazanForum 2023 international economic forum.
Billions worth of support
Financial support provided by the state remains one of the most important support measures for private investors. It includes concessional loans and deferred taxes – all this makes the adaptation to the new business environment easier and supports business activity.
For instance, an entire range of concessional loans is provided by the Russian Industrial Development Fund, which finances projects related to hi-tech products, import substitution, equipment lease, digitalization of production facilities, etc. The sums are impressive: the Priority Projects program offers loans of up to RUR 2 bln with the repayment period of up to seven years.
Agricultural companies enjoy special benefits such as payment holidays and concessional loans.
What’s important, the target audience of many support measures includes small and medium-sized enterprises. They have an opportunity to receive a payment holiday and concessional loan programs from the Ministry of Economic Development, Bank of Russia, and the Federal Corporation for the Development of Small and Medium Enterprises. SMEs that manufacture high-tech and innovative products can receive loans at a soft lending rate.
Deferrals, concessions, moratorium
Private investors can also enjoy non-financial support measures such as the simplification of public procurement procedures and procurement for companies with state participation (amendments to federal laws No. 44-FZ and No. 223-FZ), including increasing the price cap during electronic quote inquiry. In addition, punitive measures were canceled for the signed state contracts. The sanction-affected industrial companies with state participation and sole entrepreneurs received a deferral of fulfilling obligations related to subsidized projects.
Companies also received the opportunity to automatically extend the current license expiration date by 12 months. Moratorium on scheduled inspections of SMEs was also introduced.
The measures aimed to boost the domestic market have become essential, Artem Genkin emphasizes.
“This is both about the priority of domestic software that applies to the state procurement (the said software should be included in the Unified Register of the Russian Ministry of Digital Development) and the work to define the minimum share of domestic goods in such procurement under federal laws No. 44-FZ and No. 223-FZ,” Artem Genkin reminds. “Introducing a simplified scheme for interaction with government agencies on healthcare and pharmaceutical products remains a substantial measure as well.”
Stability for years to come
Investors in major industrial projects receive support under the Investment Protection and Promotion Agreements, or IPPAs, with an option for compensation of expenses on infrastructure and interest on loans and borrowings in the amount of 50-100% of the incurred expenditures. The tax deduction mechanism allows for reducing taxes on profit and property of organizations, as well as land, tax to nearly zero. The main advantage is the opportunity for stabilizing business environment; this also involves non-application of acts issued by state authorities which could worsen business conditions to the parties to the agreement. Invariance of tax and regulatory conditions are guaranteed for a long period of 6-20 years.
Investors are actively using the tool: as of April 2023, 52 IPPAs were concluded in 33 regions, with envisaged capital investments reaching RUR 2.4 tln. Most investments under IPPAs go to projects in mining, as well as in the chemical and manufacturing industries.
“IPPAs are an instrument that has been utilized in Russia since 2020, with substantial amendments introduced in 2022 to improve investors’ work and make it easier. The minimum amount of investment in projects under federal IPPAs was increased to RUR 750 mio, while the minimum amount of RUR 200 mio was introduced for regional projects,” Artem Genkin elaborates.
Offset contracts are an important format for encouraging private investments: these are agreements on modernization/building production facilities from scratch, with guaranteed sales of products. This tool is aimed at those investing in long-term projects, with contract terms of up to 10 years; often, these are life cycle projects that include all stages of product management.
The mechanism is already actively utilized in Moscow, the Moscow Region and the Republic of Bashkortostan, with other regions showing interest as well.
“According to experts, by late 2023, another 50 offset contracts will be signed in the Russian regions,” Artem Genkin notes.
Yet, he also warns of related risks, ranging from insufficient demand and a threat to competition in case there is a sole provider to the lack of a clear algorithm for prices regulation and registration. Efforts are required to diversify offset contracts in terms of industry conditions, as well as to develop clear mechanisms for attracting banking and private investments.
A separate area of activity is protection of mass investors, whose number is ever-increasing. In 2022 alone, the number of brokerage accounts on the Moscow Exchange grew by 10.7 mio, reaching 38.3 mio.
In this regard, fraud remains an issue. During the first six months of 2022, the Central Bank detected 2,288 entities with indication of illegal activities, including Ponzi schemes and illegal lenders. The essential measures to protect interests of private investors include procedures of dividing them into groups by their qualifications, Artem Genkin notes.
“The approach implies restrictions on selling particularly risky tools, such as structured products, to non-qualified investors,” Artem Genkin notes.
Non-qualified investors can still have access to stocks of companies on quotation listings, federal loan bonds and bonds of high-rated Russian companies, and others – while the access to futures, options and borrowed fund deals will be granted only after the testing.
Efficient protection measures also include introducing rules for sale of financial products and increased responsibility of financial intermediaries and investment advisers.
And obviously, insurance of individuals’ bank deposits (in case a bank’s license is cancelled) remains an essential protection tool. The coverage limit is RUR 1.4 mio per depositor. As of December 2022, insured deposits by Russian citizens exceeded RUR 36.5 tln.