New "local content" rules in Russia: Implications for Norwegian and foreign suppliers

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Newsletter

Published 14 October 2020
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New rules
In September 2020, the Russian Ministry of Industry and Trade proposed changes to the Decree No. 719, which inter alia regulates Russian local content requirements for various industries, including the shipbuilding industry. One area worth noting for foreign manufacturers and suppliers, including Norwegian companies is the introduction of a point-based system for shipbuilding industry, which is likely to influence Russian appetite to purchase foreign products.

The new local content regulations will apply for all Russian state owned companies and also for private companies which take part in public procurement processes, or which receives subsidies. It is estimated that the new rules will affect 75-80 % of the current Russian market volume within the Russian shipbuilding industry.

How the point-based system will work
If the new local content rules are adopted, Russian shipyards must ensure that a shipbuilding project (such as construction of a ship) qualifies for a certain minimum total number of points.

  • For those products that are considered Russian, the shipyard will "earn" points and for those products that are not considered Russian, points will not be "earned". For the shipbuilding industry this will mean that as long as that shipyard achieves a minimum total number of points, it will be flexibility to put together a shipbuilding project as a shipyard deem expedient.

The new rules include categorisation of various shipbuilding products in relation to which each product will also be assigned a certain number of points in proportion to their relative value. To be considered Russian (and thus be able to "earn" point), a product must comply with certain specific localisation requirements that needs to be checked for each individual category of products.    

  • A simplified example: if a Russian shipyard must collect at least 1,000 points to get a ship approved as of Russian origin and navigation equipment accounts for 500 points, RSW-system for 500 points and thruster for 500 points - then two of these products must be Russian.

Impact for Norwegian suppliers and manufacturers
It is clear that Norwegian and other foreign suppliers or manufacturers of shipbuilding products exported to Russia will be affected by the new local content rules, as Russian projects may be restricted from purchasing a foreign supplied or manufactured product.

Based on the above it also appears that foreign suppliers and manufacturers may be particularly exposed not to be chosen, if there is a Russian alternative to the foreign product. The new local content rules may also be used by Russian counterparties in negotiations to obtain favourable terms for a product from a foreign supplier.

In this context, it is key to get legal advice as to whether:

  • A product is covered by a the new local content rules
  • Which category a product fall into and how may points such product is assigned in a specific project
  • There are mitigating measures available to the manufacturer/supplier, including whether relevant exceptions/carve-outs are applicable to a specific product or project

Legal assistance
Schjødt may assist in assessing if and how these new local content rules may impact a Norwegian, UK or any other manufacturer or supplier of products to the Russian market, and in particular in respect of the Russian shipbuilding industry.