Russia has been using an ‘industrial assembly’ scheme for several years that mandates foreign carmakers and parts producers with operations in the country. Under the scheme they are required to maintain certain levels of production, obligatory technological operations, localisation and reporting, in exchange for tariff concessions. The authorised ministries have been constantly reforming the corresponding regulations, each time taking into account the subtle and problematic issues of applying such concessions.
The new national rules for the assembly of vehicles and components in Russia came into force in February 2010 and could have big implications for manufacturers and importers.
To strengthen control over the industrial assembly scheme, the Russian Ministries of Economic Development, Finance, Trade and Industry have signed a joint order introducing costly changes to material provisions that could impact carmakers’ decisions to import parts or switch to local production.
In particular, new terms for knock-down kits, or so-called “screwdriver assembly”, have been introduced for carmakers that have not yet signed the industrial assembly agreement (including Honda and Mazda). One term dictates that the number of car models assembled by kits must not exceed the number of models assembled with the help of welding, painting and car body assembly. Secondly, before the company has put in place a full production cycle, it will only be allowed to use the components liable to import concessions in models set out in the agreement (however, one model may replace the other if corresponding changes are made to the agreement by the ministries).
The reporting dates have also been changed. Instead of reporting once a year, now companies will have to report to the Ministry of Economic Development twice a year, while the reporting itself–which should now be submitted in paper and electronic form–has become more complex.
The order also introduces a new remedy against a default on the key terms of the agreement that includes suspension of the release of goods and the recall of tariff concessions.
Moreover, Russia has also moved to start an official customs union with Kazakhstan, which is likely to eventually include Belarus, an action that could delay its entry to the World Trade Organisation. When this customs union starts functioning, the industrial assembly scheme will change as well, including the exemption from import duties for components used for production in the union.
The Russian, Kazakh and Belarusian customs union legislates for the possibility of applying zero-rated or reduced duty rates provided that the company is authorised by a member state of the union. Based on existing practice in Russia, such authorisation would take the form of a letter from the Ministry of Trade and Industry on the intended use of goods imported for assembly.
Customs union legislation allows for such a localisation requirement through the use of manufacturing components in other member-states of the customs union. Thus, with the uniform customs tariff coming into force, all components manufactured on the territory of the customs union will be regarded as domestic.
Today, in Russia, localisation is considered as being a 30% cost reduction in the list of components and spare parts imported by the company (for residents of industrial and production zones, it is considered to be 50%).
Also, effective since January, vehicles assembled in Russia prior to the creation of the unified customs territory will be imported to Kazakhstan and Belarus duty-free if their assembly meets the requirements of such things as localisation and production volume. If these criteria are met, cars are considered as having been manufactured on the territory of the customs union.
The list of companies that could benefit from such a concession was approved in January by the Commission of the customs union. They are in the great majority from Russia, including 19 Russian companies, one company from Kazakhstan and one from Belarus. But this balance could change in future, considering that such concessions will be introduced to other types of transport, including buses and special-purpose machinery.
