On 01.04.2020, Federal Law No.69-FZ “On protection and promotion of investments in the Russian Federation” (hereinafter the “Law”) took effect. This law introduced an instrument new to domestic investment relations – an agreement on protection and promotion of investments (hereinafter the “APPI”), which is to be entered into between investors and public entities with regard to implementing investment projects. In exchange for investments into the Russian economy, the investor can count on a number of government support measures: protection against changes in land use conditions and implementation of urban planning, customs duties, as well as partial compensation for the costs of constructing, reconstructing or modernizing the related and fundamental infrastructures of a project.       

 1. Agreement on protection and promotion of investments (hereinafter the “APPI”)

The APPI is to be executed using a template which will be approved by the Russian Government, and has the following features:

1.1.      Parties to the APPI

The APPI is entered into between a public entity and an organization implementing an investment project (hereinafter the “Organization” and the “Project”). Only a Russian entity can act as the Organization, except for state and municipal institutions and unitary enterprises.

Both, the Russian Federation and its regional entities, as well as municipal ones, can act as the public party. The law allows several entities to simultaneously be on the side of the public party, provided that the region of the Russian Federation where the project is to be implemented must in any event be a party to the APPI.

The law prescribes that an APPI to which the Russian Federation is not a party or where a municipal entity is a party may be entered into no earlier than one year from the date the Law took effect.

1.2.      Subject matter of the APPI

Under the APPI, the Organization undertakes to build and use new real estate facilities (or a complex of interrelated immovable and movable property) or modernize, reconstruct and use existing facilities.

The APPI cannot be entered into in respect to the following activities:

• gambling industry;
• production of tobacco and alcohol products, liquid fuels;
• crude oil and natural gas production;
• wholesale and retail trade;
• activities of financial organizations supervised by the Russian Central Bank;
• construction of administrative and business or shopping centers and residential buildings.

The public entity undertakes to ensure the fulfillment of a stabilization clause in respect to the Organization’s activities (see item 2 below), as well as to provide government support measures (see item 3 below).

2. Stabilization clause

The stabilization clause of the APPI provides for not applying against the Organization regulations of the public entity, which impair conditions for implementing the Project, in particular:

• Regulations increasing rates of export customs duties do not apply during the term set forth in the APPI;
• Regulations changing conditions of providing government support measures (see item 3 below) do not apply during the term set forth for the government support measures;
• Regulations impairing conditions of land use and urban development do not apply for 3 years from the date they take effect;
• Regulations increasing rates (or expanding the list of taxable items) of fees for negative environmental impacts, for using water bodies, utilization fees and environmental fees do not apply for 3 years from the date they take effect;
• Regulations increasing rates of fees per volume unit of forest resources or changing the procedure for determining lease fees for using a forest plot, do not apply for 3 years from the date they take effect;
• Provisions of legislation on taxes and fees apply subject to the peculiarities established by the Russian Tax Code.

With regard to a particular Organization, the maximum term of the stabilization clause begins from the date the APPI is entered into, depends on the scope of the Organization’s investments in the Project and may last from 6 to 20 years. When the stabilization clause expires, the Organization will become subject to the newly adopted regulations.

The number of non-applicable regulations depends on who acts as the public party (the Russian Federation or its region) and on the amount of investments: the larger they are, the more exceptions apply to the Organization.

An Organization enjoys the greatest number of exceptions if the Russian Federation is a party to the APPI and under the APPI the Organization is investing at least RUB 10 billion.

For failing to meet the conditions of the stabilization clause, the public entity shall be liable in the form of compensation for real damage incurred by the Organization in connection with the breach of the stabilization clause, but in the amount not exceeding the amount of tax payments to be made by the Organization due to implementation of the Project to budgets of the public entities being parties to the APPI.

The procedure for calculating real damage to the Organization must be approved by the Russian Government.

3. Application of government support measures

Under the APPI, the Organization is provided government support measures in form of compensation of costs:

•  of building, modernizing, reconstructing the fundamental infrastructure of the Project (maximum 50% of costs) and related infrastructure of the Project (maximum 100% of costs);
• of paying interest under credit and loan agreements entered into for implementing the Project.
• Fundamental infrastructure includes facilities of social, utility, transport and other infrastructure used solely for implementing the Project; related infrastructure includes the said facilities used for both the Project implementation and other purposes. As with respect to compensation for real damage, the amount of costs to be compensated cannot exceed the amount of obligatory payments to be made by the Organization to budgets of the public entities that are parties to the APPI.

Note that the APPI can provide other government support measures not defined by regulations, the amount of which cannot exceed the amount of the Organization’s investments in the Project.

4. Execution procedure for the APPI

The APPI can be executed based on a private or public initiative:

• As a private project initiative: The Organization submits to the authorized body an application for an APPI with a number of documents attached, such as a draft APPI, business plan, financial model of a Project, construction permit and other documents. The application for executing the APPI must be considered within 30 business days. The law contains a limited list of grounds for denying an application for an APPI (for example, the Project is not new, the application was improperly submitted, the applicant submitted false information regarding itself, etc.);
• As a public project initiative: The APPI is executed based on published declarations on Projects to be implemented, in which authorized bodies declare the Projects planned for implementation. In this event, the APPI is executed based on the results of a tender. An entity that proposes the largest amount of investments, or the smallest scope of government support measures, or the shortest timeframes for the Project to be implemented can win a tender.

The APPI can be executed on or before January 1, 2030. The APPI may be executed using the state information system “Investments,” which will be launched one year from the date the Law took effect. Until then, the Agreements will be executed in hardcopy.

5. Legal doctrine of related agreements

The Law introduces the doctrine of related agreements.

Recognition of an agreement as binding entails incorporating in the APPI the obligation of the public entity to compensate the Organization for real damage incurred due to the public entity breaching the terms of related agreements, as well as changes in the values of long-term parameters for regulating activities of regulated organizations.

Related agreements can include:

• Agreements for subsidies and budget investments;
• A loan agreement providing loans to the Organization at a reduced interest rate[1];
• An agreement between the Organization and a regulated organization (in respect of which prices are regulated by the state), containing conditions established on the basis of the values of long-term parameters for regulating activities of regulated organizations.

6. Use of the APPI in concession / public- or municipal-private partnership agreements

The stabilization clause can also be used in concession agreements (hereinafter the “CA”), public- and municipal-private partnership agreements (hereinafter the “PPPA”), provided that:

• Both the APPI and CA/PPPA are entered into between the Organization and the public entity;
• The CA or PPPA provides that the public entity is liable for amendments to effective regulations/resolutions applying to the Organization.[2]

If the stabilization clause is breached, the public entity will be liable to the extent provided by the Law (see item 2 above), and to the extent exceeding the amount of compensation provided by the Law, pursuant to Federal Law No.115-FZ “On concession agreements” dated 21.07.2005, Federal Law No.224-FZ “On public-private partnerships, municipal-private partnerships in the Russian Federation and amendments to certain legislative acts of the Russian Federation” dated 13.07.2015 and/or the terms of the CA/PPPA.

7. Effective date of the Law  

The Law took effect from the date of its official publication on April 1, 2020, except for the provisions with respect to design and operation of the state information system “Investments,” which will take effect one year from the date of official publication of the Law.

The law leaves a significant part of regulation to a sub-statutory level, and its full implementation will in any case require executive bodies to adopt the necessary regulations.