What does this step mean for the Russian economy and foreign investors? Tatiana Kruglova, CEO of the TARGO Group customs holding company, in an interview with Alexander Bondar.
“It is a fact that economies relying on innovation and cutting-edge technology prove to be the most competitive when crises end,” Kruglova said. “It is therefore logical that Russia is also taking steps in this direction. It has long disliked the commodities tilt in its own economy and, naturally, technological overhaul is one of the ways to reach a new level, to reduce its oil and gas dependence.” In other words, the decision was right and the amendments timely, capable of encouraging business activity, which is welcome during a global crisis and stagnation.
Now it is the matter of time necessary to compile a list of eligible equipment, on which several ministries are working. After that, it will be possible to receive VAT exemptions within three months.
Businessmen hope that this work won’t take too long, Kruglova emphasised. The crisis shows no sign of subsiding, and so we must make the new rules work as soon as possible, then it will be easier to work in Russia for both Russian businesses and foreign investors.
Still, there is a significant reservation.
Having abolished VAT, legislators simultaneously eliminated the existing VAT exemption for foreign goods investment.
In the past, foreign investors did not pay VAT if they were building a plant in Russia and were importing technological equipment to include in its authorised capital. But as soon as the new amendments come into force this preference will be eliminated. Like Russian businessmen, foreign investors will not pay VAT when importing equipment that has no analogues in Russia, but even the most cutting-edge technology, the most state-of-the-art plant cannot function without lots of additional equipment that has analogues in any country.
Besides, these analogues cannot be mechanically put to service, say, an imported super-modern assembly line.
What does it mean? Paying the 18% VAT? That is an unexpected turn indeed… “For example, we produce quite a lot of cement. But there are types of it that are not produced in Russia.
It would be good to begin their production here, but now the cost of such a project will be increased by the size of VAT,” Kruglova explained. “The fine line between new and common technologies can turn out to be too expensive to pass.” It would be wrong to think that all Russian businessmen are now on alert, waiting for the signal, for the opportunity to import unique equipment without paying VAT. Yes, they will import more than now, but imports have currently stalled near zero, Kruglova says. Russian businesses do not have free cash now and are unlikely to get it in the near future.
The crisis is having its impact and, besides, Russian businesses have borrowed a lot in the West – the aggregate corporate debt amounts to some $500bn. Now they have to think about paying their debts and not going bankrupt.
The Russian export market is shrinking, and not only in the oil sector. Some commodities are sold in the global market at a price that is lower than the prime cost of similar Russian goods.
A relevant example is Chilean copper, Kruglova points out. The price of Russia copper is higher because of rigorous climate.
In other words, Russian businessmen would be glad to respond to calls like “Save on VAT, invest in business overhaul,” but their bank debts are too big.
There should be no vain hopes. Those whose debts are smaller will turn to Western banks, where the interest rate is definitely lower than in Russian banks.
But there are few such businesses in Russia now.
This does not mean that the decision to abolish VAT on imports of unique technological equipment does not give Russia anything. It does, and it will do even more in the future. It is even helping now, during the crisis. But the results could have been greater, if not for the situation in the country.
Foreign investment could be a lifesaver in current circumstances. “In my line of work, I meet representatives of many European banks – from Switzerland, Germany, etc,” Kruglova says. “Yes, everyone is having difficulties there, but they have money, and financiers are willing to provide it for interesting projects.
Russia badly needs to develop its own manufacturing, it needs foreign goods investment.” “We can no longer say that we have cheap workforce, as it has become much cheaper in neighbouring countries,” Kruglova adds. “Are energy and commodities cheaper? This is also questionable.
There are fewer and fewer things left [in Russia] to tempt investors.
Now the VAT preference has been eliminated, and this is 18% of the price of imported equipment, to be paid immediately during customs clearance.” After the abolition comes into force, the amount of foreign goods investment in Russia will drop, Kruglova forecasts.
Can the events take a different turn? Yes. There are still a few months to go.
The new VAT preference will come into force, simultaneously abolishing the preference for importing equipment to a company’s authorised capital.
Businesses will definitely express their views on the consequences of this move. However, the situation and the sphere where this preference is or is not used are highly specific and relevant only for a narrow economic sector. It kind of remains outside the major developments on the market; it doesn’t apply to the majority, and this makes it difficult.
Kruglova believes that the best solution would be to introduce the new preference while simultaneously preserving the old one.
Will it be the case? It remains to be seen and reported.
