A special economic zone to promote brisk growth in the Crimea peninsula over time

As a reminder, the Federal Law On the Special Economic Zone in the Kaliningrad Region came into effect on April 1, 2006. The Federal Law established in the Kaliningrad Region a special legal regime for economic, industrial, and investment activity for a period of 25 years, i.e. until 2031. The Federal Law provides for a special status of SEZ resident (legal entity) which is listed in the unified register of residents and engaged in an investment project. Residents are subject to a special procedure for payment of the corporate profit tax and corporate property tax:

first six years from the date of entrance into the unified register of residents – at a rate of 0%;

7 thru 12 years – 50% of the duly established rate.

Other taxes and levies shall be paid as prescribed by the applicable laws and regulations of the Russian Federation.

Furthermore, the Federal Law establishes:

• a customs procedure for the free customs zone with respect to goods shipped by legal entities into the Region for domestic consumption;
• a simplified visa issuance procedure for foreign nationals – residents' representatives;
• guarantee to take no measures increasing the tax burden upon residents;
• a transition period in respect to legal entities running their business in compliance with the Federal Law on the SEZ. During the foregoing period, no customs duties and taxes shall be imposed on the output for free circulation of compensating products of goods shipped into the Region compliant with the free customs zone regime, provided that the goods meet the substantial transformation criterion (the transition period lasts until April 1, 2016).

Lowering customs duties may encourage foreign businesses to export in parts and components at preferential rates, and Russian exporters may benefit too. However, at least within the year to come the Crimea will see no potential investors other than mostly Russian public entities, because of the current political risks.

Furthermore, the Crimea is facing the infrastructural challenge: the peninsula runs short of water resources and depends on supply energy resources from Ukraine. Therefore, aside from granting administrative preferences provided for by the SEZ regime, the Russian federal authorities should invest substantially in the Crimean infrastructure. To encourage investors, it's important to have prepared manufacturing sites with utility networks and infrastructure.

Investment activity will be growing in the Crimea if Russia continues the previously announced policy. Public entities will emerge in the peninsula soon, Russian private businesses will come later. Foreign businesses will enter in a more distant prospect.

Indeed, the peninsula has clusters for the development: shipbuilding industry, seaport, agricultural industry, especially winemaking sector, and vast tourism sector. Plus oil and gas production including the Black Sea shelf. The establishment of a Special Economic Zone in the Crimea will definitely facilitate the development of the peninsula.

Nadezhda Volovik, Head of Gaidar Institute's Foreign Trade Department