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Russia Still Pursuing SEZs For 2006

by Tatania Smolenskaya,, Moscow

29 December 2005

Russia is still pursuing the idea of special economic zones, according to Economy Minister German Gref, speaking to Bloomberg this week. The plan was agreed by the government last March and passed its first reading in the Duma in June.

The government wants to diversify away from its unhealthy dependence on oil and gas revenues, although it must be hard for ministers to keep their heads in the dizzying torrent of cash gushing from swelling energy exports at ever higher prices. Excess spending has driven inflation to more than 11% this year, and it will barely fall next year. Even so, the government has so far piled up more than $43bn in a 'stabilization' fund meant to neuter at least some of the wave of cash it is receiving.

'At least 10 Russian and foreign firms are waiting for this law and are ready to invest in 2006', said Gref. But Prime Minister Mikhail Fradkov has warned that the zones, which will benefit from tax concessions, and will be allowed to import materials free of duty and VAT, should not be abused. Companies setting up in the zones will have to have charter capital of not less than 10 million euros, and will not be allowed to operate elsewhere in Russia.

Fradkov was alluding to the widespread use of a previous generation of tax-free zones to channel large volumes of metal processing, oil and gas refining and other industrial activity through the zones in order to gain tax advantages. Although the techniques used were according to the letter of the law, the government has since attacked such practices, most notably in the case of Yukos. The enormous retroactive tax claims imposed on the company largely relate to its activities in tax-privileged zones. So companies probably don't need reminding to be careful in any new zones that are set up!

Gref said in the spring that the new zones would be built with new infrastructure on virgin land, and he expected companies to open up in the zones in 2007. He said that a new federal agency would be set up to manage the zones, which would have much more limited powers of inspection and interference than existing regulators.

Deputy Economic Development and Trade Minister Andrei Sharonov said in July that the zones are based on three key ideas. "One of them is a simplified procedure for the allotment of land plots with existing infrastructure. The other idea is facilitating administrative barriers and, therefore, reducing startup costs in those areas. Third, this instrument grants tax breaks and customs preferences to companies working under that regime," he added.

Companies including Fabriano, Indesit and Toyota are interested in building factories in the planned zones, said Yuriy Zhdanov, the head of the economic zone agency, earlier in December.

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