"The expansion of pharmaceutical production in Russia must become attractive for investors and foreign manufacturers. It is especially important that pharmaceutical manufacturers who have ventured into Russia be supported." - Various options were weighed in a panel discussion at the Russian Chamber of Commerce and Industry.

At the end of October 2021, a round table discussion was held at the Russian Chamber of Commerce and Industry on the topic of "Establishing industrial production by foreign manufacturers in Russia". Successful practices, problems and possible solutions were discussed. Representatives of the pharmaceutical industry also took part in the discussion.

Pharmaceutical manufacturers in Russia are reimbursed for up to 100 percent of their expenses

One of the options for promoting investments that was presented in the panel discussion is the so-called Agreement on the Protection and Promotion of Capital Investments (SZPK). Such an agreement can regulate several aspects of cooperation between the state and the investor. Among other things, the investor is reimbursed for up to 50 percent of the expenses for the infrastructure that is directly necessary for the project and up to 100 percent of the expenses for the ancillary infrastructure that also serves to open up and develop the region. Stable electricity and transport tariffs are also guaranteed if the supply or transportation is carried out by a state-owned company.

In order to be eligible for an SZPK agreement, the investor must invest at least 1.5 billion rubles (approx. 18 million euros) of equity in the project.

The mechanism of the SZPK agreement is still being worked on. Andrei Ivanov, representative of the Russian Minister for Economic Development, reported on the innovations. In September of this year, a draft regulation on the conclusion of SZPK agreements was published, which is intended to replace the temporary regulation that has been in place. All SZPK agreements were already supposed to be concluded in electronic form, but the corresponding electronic system has not yet been put into operation. The new regulation also allows SZPK agreements to be concluded in paper form. Some pharmaceutical companies, including the Russian pharmaceutical manufacturer "R-Pharm", are already benefiting from the advantages of the SZPK agreement.

Once the SZPK agreement has been concluded, the investor can also expect the tax burden not to change for the duration of the agreement (6 to 20 years); taxes can be frozen for as long as the agreement remains in effect. However, such an agreement does not provide for tax reductions. This can be regulated in a separate agreement, namely a Special Purpose Investment Contract (SPIK).

Immediate preferences in the Russian domestic market

Under the special investment contract (SPIK contract), the investor undertakes to set up production in Russia using innovative technology. The technology does not necessarily have to be developed in-house. The SPIK agreement can also be concluded if the innovation originates from a third party, but the investor has acquired rights or licenses to it. In return, the investor can be granted tax reductions - for example, the income tax rate can be set to zero. In addition, the state assumes liability for any deterioration of the tax situation.

Of particular importance in such a SPIK contract is the provision according to which all products manufactured as part of the project are immediately deemed to be "Made in Russia" from the moment the contract is concluded. This offers the investor many attractive opportunities, such as advantages in the distribution of state-funded contracts, where priority is given to manufacturers based in the EAEU region.

The new regulation on SPIK contracts came into force at the end of 2020. In the new version, the minimum investment amount was abolished and the contract terms extended: for an investment amount of up to 50 billion rubles, the contract can be concluded for a period of 15 years, for higher amounts  up to 20 years.

Viktoria Volkova, Head of the Industrial Policy Department at the Russian Foundation for the Development of Industry, reported in her presentation that pharmaceutical manufacturers had concluded several SPIK contracts worth 20 billion rubles (approx. 24 million euros) by the end of November 2021.

The industry has also voiced criticism of some aspects of the two support mechanisms. According to Marija Tyurnikova, Head of Legal Affairs, Compliance and Sustainable Development at Swiss Big Pharma company Roche, the SPIK agreement lacks legal remedies for the protection of intellectual property. According to Tyurnikova, this is one of the reasons why Big Pharma has rarely used this mechanism to date.

Image: Ivan Karpov, unsplash.com