Start of production in Russia for foreigners

Mainstream

Starting production in Russia for an international company is not just construction and equipment purchase. This is the legal and operational security strategy of the asset.

The question is not whether a factory can be built. The main question is whether it is possible to maintain control over it, protect investments and ensure uninterrupted production with an acceptable cost.

Effective preparation for launch begins with three checks:

1. Is there a legally flawless land plot and permits?
2. What corporate structure and contractual framework protects control of the asset?
3. Where are the critical points of administrative and sanctions pressure?

If these three issues are not resolved before the investment begins, a company may successfully complete the construction project but lose the asset due to a corporate conflict, government claims, or blocking operating restrictions.

When it is necessary to prepare for launch

Comprehensive preparation for the start of production is necessary if:

• The international holding decided to localize in the Russian Federation;
• Relocation of production facilities from another jurisdiction is required;
• The company is entering Russia for the first time and does not know the regulatory landscape.
• The existing plant (M&A) will be purchased with further modernization.
• a joint venture with a local partner;
• the investment project claims to be state support measures (SPIC, SEZ, TOP);
• Production technology requires special permits or licensing.
• business is associated with critical infrastructure, subsoil or objects of high environmental risk;
• Protect sensitive technologies, know-how or patents from being opened by regulators or partners.

The mistake most companies make

Many companies start with the question:

Where can I find the right place?

That's the wrong first question.

The right question is:

What legal architecture will provide the maximum protection for investment and operational control in the current regulatory and sanctions environment?

Sometimes the best result is given by your own "daughter" in Russian jurisdiction. Sometimes a joint venture with a special corporate contract (under foreign law). Sometimes – autonomous assembly under a license contract without direct ownership. Sometimes - the acquisition of an asset for a structure with redomiciliation in the ATS.

Starting production in Russia requires not a design and construction plan, but a legal and compliance strategy.

Step 1. Conducting a legal audit of the project

The first thing to learn is not a business plan or profitability, but a legal model.

Key provisions:

• Who is the beneficiary and is not subject to restrictions;
• ownership structure: Directly or through intermediate jurisdictions;
• the status of the controlling person and obligations to the FTS / Central Bank;
• the presence of restrictions on foreign exchange transactions;
• requirements for localization of production and components (PP 719, 616);
• the need to obtain the status of a Russian manufacturer;
• licensed or quota-based activities;
• Export controls and restrictions on technology transfer;
• Migration legislation for expats (quota, work permits);
• the regime of personal data protection (152-FZ);
• requirements for industrial safety (116-FZ).

If the audit is conducted superficially, the risks become critical. But the complete absence of violations at the start is not always achievable: In many cases, it is more important to correctly assess the level of acceptable risks and to put mechanisms for minimizing them into the project roadmap.

Step 2. Select and check the site: Due Diligence of Land and Object

To start production, it is not the price that is important, but the purity of the title and the urban development potential.

We need to prepare:

• extract from the USRN with the history of rights transfers;
• analysis of the legal regime of the land and the category of permitted use (PZD);
• Urban planning plan of the land plot (GPZU);
• information on easements, security zones, red lines and encumbrances;
• data on the sanitary protection zone (SZZ) and zones with special conditions for the use of territories (ZOUIT);
• Preliminary technical conditions for connection to networks;
• Environmental audit of the site (retrospective responsibility);
• Physical due diligence of buildings and structures, if the site is purchased as a brownfield;
• analysis of related land users (risks of blocking the passage);
• information about the presence of main pipelines or high voltage lines.

Particularly valuable are the documents confirming the absence of claims of third parties and municipal plans for the seizure of land for state needs.

Step 3. Determine the regulatory and sanctions card

The Regulatory Map answers the question: What state permits are needed before investing the first ruble in construction?

This has an impact on:

• the possibility of foreign control over the personal data operator;
• obligations to store data on servers in the Russian Federation;
• application of the rules of the “third stage” at currency control;
• obtaining the conclusions of Rospotrebnadzor and Rosprirodnadzor;
• passing of the state environmental examination (SEE);
• Compliance with Critical Information Infrastructure (CII) requirements
• blocking export and import restrictions on equipment;
• Software licensing and transfer of rights to cryptography (notification of the FSB);
• Restrictions on persons from “unfriendly” jurisdictions.

An error at this stage can lead to the freezing of the construction site at the pit stage and an administrative fine comparable to the cost of the project.

Step 4. Checking Contractors and Supply Chain

The supply chain determines whether the plant will be built and what the cost will be.

It is necessary to check:

• the ultimate beneficiaries of the general contractor and key suppliers;
• affiliation with persons under sanctions;
• experience in similar projects and reputation;
• compliance of equipment with localization requirements;
• cross-border supply routes and compliance with export control;
• conditions for circumventing sanctions restrictions and minimizing the risks of secondary sanctions;
• the possibility of obtaining guarantees and post-sales service;
• availability of Russian analogues of components in case of import blocking;
• stability of counterparties in the conditions of volatility of the ruble exchange rate.

If the supply chain depends on a single unstable link, the whole project becomes hostage to that link.

Step 5. Select an entry strategy: own structure, joint venture or contract

Own subsidiary (LLC/JSC) is often used for full control, but requires a deep dive into corporate regulation.

Suitable if:

• The sanctions risks are minimal;
• Technology is unique and cannot be trusted by a partner.
• the company is ready for independent administration of the Russian legal entity;
• the risks of recognition of CFCs and taxation of profits are taken into account;
• Beneficiaries are willing to disclose or use legitimate privacy mechanisms.

A joint venture is relevant for risk sharing and the use of the partner’s administrative resources.

Suitable if:

• Quick access to the network area is required;
• the partner has the status of a Russian manufacturer or licenses;
• investment costs are divided;
• Russian state support measures are required.

A corporate contract in a joint venture should be governed by foreign law (e.g. English) with an arbitration clause to resolve deadlocks, but it should not contradict the mandatory norms of Russian corporate law.

Contract assembly/license works if the purpose is to be present in the market without direct investment in the plant.

Suitable if:

• a sufficiently qualified local manufacturer;
• The risks of technology opening are minimal or managed through know-how in a closed mode.
• Investments in machine tools and equipment are controlled through a separate lease or leasing agreement.

Step 6. Protecting Intellectual Property and Technology

This is a key stage, often underestimated before launch.

Before construction begins, it is necessary to decide:

• where the patents will be registered (RF, EAPO) and whether it will be done on a Russian legal entity;
• How to transfer know-how: a closed license or contribution to the authorized capital;
• How to organize physical and digital protection against copying (trade secret regime);
• Who will own the technological documentation;
• whether there is a risk of compulsory licensing or disclosure of data to government agencies;
• how the software controlling the machines is protected from unauthorized access;
• What is the fate of IP in case of withdrawal from the project or bankruptcy of a Russian legal entity?

Losing control of technology in a foreign jurisdiction means losing the market forever.

Step 7. Design the permitting system: construction

Project documentation and a positive expert opinion are not technical documents, but a legal shield from the construction stop.

The process should include:

• engineering surveys;
• Environmental impact assessment (EIA) and SEE;
• Project CZD;
• stage "P" with the passage of Glavgosexpertiza;
• construction permit;
• Connection to networks on a permanent basis;
• Private easements, if communications pass through foreign areas;
• commissioning permit;
• state registration of the object of NVOS (negative impact);
• Obtaining a comprehensive environmental permit (EPP), if applicable.

Errors in obtaining permits or building without them often lead not just to a fine, but to the demolition of unauthorized buildings at the expense of the investor.

Step 8. Set up corporate control, financing and personnel

After the start of construction, it is necessary to prepare a legal framework for operating activities.

Documents and decisions should take into account:

• financing procedure: loans from a foreign parent company, property contributions, leasing;
• restrictions on the issuance of loans and the “tax shield” on interest;
• Certification of import contracts and registration with the bank;
• employment contracts and policies in accordance with the TC of the Russian Federation (localization of personnel documents);
• collective bargaining and trade unions, if the production is large;
• Migration registration and work permits for highly qualified specialists (HQS);
• development of policies on industrial safety and labor protection for specific facilities;
• lease, contract and operation contracts in currency and subject to sanctions clauses.

Step 9. Start production: from formal acceptance to serial production

Commissioning is not just about signing the acts of builders. This is the legitimization of the object before the state.

It is important to check in advance:

• correctness of registration of primary (TORG-12, acts, UPD) and currency declarations;
• compliance of products with mandatory requirements (TR CU, GOST);
• obtaining declarations or certificates of conformity;
• registration of products in the system "Honest Sign", if required;
• obtaining a conclusion on confirmation of production of industrial products in the territory of the Russian Federation (for participation in public procurement);
• Implementation of an environmental management system to minimize payments and audits
• Preparation for the first inspection of Rostekhnadzor.

Step 10. Incorporate compliance and risk prevention into operations

Operation is a separate project that includes:

• monitoring of changes in regulation and sanctions regimes;
• regular audit of foreign trade for the subject of “shadow fleet” and “subsanctions” chains;
• interaction with state bodies (regulatory support);
• Tax risk management (TPAs, controlled transactions);
• Protection against hostile takeovers and corporate conflicts;
• investment strategy and “plan B” (exit strategy) with minimal losses;
• documentation of receipt of state support measures and subsidies to exclude misuse.

In practice, the stage of operational prevention is often more important than the start. This is where the investment is either protected or the project becomes a center of loss and legal problems.

Own production or partnership: pick

The choice does not depend on the overall localization fashion, but on the specific technology, planning horizon, beneficiary sanction profile and depth of the contract manufacturers market.

How to strengthen your position before investing

The best start-up of production starts a year before the purchase of land.

Prior to the start of active investments, it is necessary to:

• conduct full regulatory due diligence;
• to develop the corporate architecture and funding structure;
• register trademarks and patents for a Russian legal entity;
• to analyze potential measures of state support and requirements for their receipt;
• to include in the preliminary lease/purchase agreement the pre-suspension conditions for obtaining permits;
• Develop employment contracts with options and confidentiality for key personnel
• set up a commercial secret regime for documentation;
• to introduce sanctions and anti-corruption clauses in standard forms of treaties.

The project should be ready not only for the grand opening with the governor, but also for a sudden visit of the prosecutor's office.

Common mistakes in preparation for launch

1. Start construction before obtaining a clean category of land The company can spend millions on construction, and then sue for the inability to obtain permission to enter.

2. Ignoring the sanitary protection zone Housing or social services within the radius of the GZZ can make the launch impossible.

3. Disclosure of technology without know-how without evidence of the introduction of a trade secret regime, it is almost impossible to recover losses for copying.

4. In a conflict, the real owner may lose the asset without a chance for judicial protection.

5. Failure to take into account currency restrictions: delay in the registration contract or an error in the appointment of payment can lead to large fines.

6. Parallel imports do not remove the risk of claims from the original rightholder from an unfriendly country after the stabilization of relations.

7. By oral agreement with local authorities, the investor must require documentation of benefits, subsidies and network tariffs.

8. Without a duplicate local management system, the departure of the director paralyzes the plant.

Investor checklist

Before starting the project, 15 questions must be answered:

1. Who is the ultimate beneficiary and is he subject to sanctions?
2. Does the land allow this kind of production to be built?
3. Is there a plan and a connection plan?
4. Have you received an environmental assessment (EEE)?
5. What corporate structure will provide control and protection against seizure?
6. Are there any patent/licensing risks associated with the technology?
7. Who is the contractor and its ultimate beneficiaries?
8. How is the know-how protected in the project and work documentation?
9. Are products subject to mandatory labeling and certification?
10. Is there a risk of a “third country” being breached when transiting equipment?
11. Have you signed employment contracts with the HQS and received patents?
12. Can I apply for SPIC 2.0 or the status of a Russian manufacturer?
13. Is the security passport (anti-terrorist protection) ready?
14. Is there a mechanism for repatriating dividends?
15. What is Plan B for a complete blockage of imports?

What a strong launch strategy looks like

A strong strategy usually includes five levels:

1. Legal & Regulatory Setup Verification of land, legal entity, intellectual property, foreign trade regime and sanctions risks.

2. Permitting & Licensing Design, GPZU, expertise, construction permit and commissioning.

3. Corporate & Financial Structuring Determination of the jurisdiction of the holding, currency control, TP and financing.

4. Operational Compliance Labor relations, industrial safety, ecology, “Honest Sign” and work with government agencies.

5. Government Relations & Advocacy Inclusion in the registers of the Ministry of Industry and Trade, obtaining subsidies, interaction with the REC and resolving administrative barriers.

Without a fifth level, a project can suffocate in a bureaucratic routine, even if it is perfectly funded.

FAQ

Yes, but with restrictions for residents of “unfriendly” countries: The approval of the Government Commission for Foreign Investment Control is required.

Which to choose: For non-public manufacturing business, an LLC is often more convenient due to the flexibility of management and less mandatory disclosure, but a JSC is preferable when planning for exchange financing.

It is possible, but the company will close access to public procurement, subsidies and support measures under SPIC.

Export control and obtaining an FSTEC opinion or FSB notification before the transfer of technology is initiated is necessary, otherwise criminal liability will arise.

Corporate agreement under foreign law, prohibition on alienation of shares, pledge of equipment in favor of the creditor, strengthened security service and transparent legal history of each asset.

Only within the quota established by the region, or when registering employees as highly qualified specialists (HQS) with wages above the established threshold.

For capital construction facilities for industrial purposes - yes, with rare exceptions for technically simple facilities.

More importantly: To build or legalize?It is more important for business to uninterruptedly produce products. Therefore, registration of ownership of the object and obtaining a CER is more important than the speed of installation of equipment.

Related services

• International Corporate Structuring & Governance
• Industrial & Manufacturing Regulatory Compliance
• Sanctions, Export Controls & International Compliance
• Intellectual Property, Technology Transfer & Trade Secrets
• Environmental, Health & Safety (EHS) Law
• Government Relations & Regulatory Advocacy
• Cross-Border M&A and Joint Ventures
• Tax Structuring & Currency Control

Related material

• How to buy a production site in Russia: Due Diligence for Investors
• SPIC 2.0: How to enter into a special investment contract
• How to protect technology during transfer to Russia
• Regulatory risks of ‘unfriendly’ investors in industry
• Parallel Imports and Intellectual Property: defense
• Environmental safety of the enterprise: How to pass the check without penalties
• How to get the status of a Russian manufacturer for the Ministry of Industry and Trade
• Currency control for foreign “daughters” in Russia

Conclusion

Preparing for the launch of production in Russia for an international company requires not a project estimate, but a legal security strategy.

A strong position is based on clean land title, protected intellectual property, sanction-resistant ownership architecture, pre-received permits and proactive relations with government agencies.

In investment projects in Russia, the winner is not the one who fills the foundations faster. The winner is the one who understands in advance how to legalize the object, avoid blocking regulations, retain control over know-how, and turn administrative barriers into manageable procedures.