TRADING TODAYIN RUSSIA Part I – Russia's Accession to the WTO Expected Impact on the Russian Economy

Alexey AronovITCF's International Symposium

Amsterdam, 16 April 2013

Three Main Driving Forces of the International Trade Improvement in Russia

1. Russia's accession to the WTO on 22 August 2012.2. Recent establishment of the Customs Union with Belarus

and Kazakhstan followed by the forming of Free Economic Space and creation of common markets for goods, services, capitals, and labor.

3. The implementation of package of local initiatives aimed at improving Russia's ranking for global trade.

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WTO Impact (1)

All necessary changes to Russian legislation were made during the preparation stage, which lasted 18 years. Owing to this reason no significant changes to Russian law are anticipated as a result of Russia's accession to the WTO.

Further development is expected primarily in the law enforcement sphere. The main question is now is how Russia intends to meet the WTO requirements documented in the accession package.

Leading economists think that 5 -7 years are necessary before we see the first effects of the accession.

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WTO Impact (2)

Russia will have to discontinue its protectionist policy, where high import customs duties and tough restrictions and limitations are often applied to protect local manufacturers in various sector of economy.

Average weighted rate of import customs duty will be gradually reduced from the current 10.3% to 5.3% by 2018.

The tariff escalation principle shall remain as the main rule: higher rates of import customs duty apply to finished products; lower import tariffs apply to raw materials, parts and components.

Most production equipment remains to be subject to zero import customs duty.

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Customs Union Impact (1)

Stage 1 - The Customs Union was established on 1 July 2010 between Russia, Belarus and Kazakhstan (common market for goods).

Stage 2 – The Common Economic Space was created on 1 January 2012 (common markets for capital, IP, services and labor).

Stage 3 – Eurasian Economic Community (EvrAzEC) is planned to be formed on 1 January 2015 (further integration with Kyrgyzstan, Tajikistan, Uzbekistan, Armenia, Moldova and Ukraine).

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Customs Union Impact (2)

Unification of technical regulations 14 common technical regulations of the Customs Union are

already effective and 17 more have been adopted but will only become effective in two years. Many more are expected.

Mutual recognition of CU Certificates on the whole territory of the Customs Union. Recognition of European certificates is not planed, however European protocols of tests will be acceptable provided that the same or similar regulations apply in the EU and the Customs Union.

Codification of Legislation in Future Current legislation of the Customs Union consists of 64

treaties, 911 resolutions of the CU commission, over 500 legislative acts of the Eurasian Economic Commission.

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Local Initiatives Aimed at Improving Russia's Ranking for Global Trade (1)

On June 2012 the Russian Government introduced an ambitious plan aimed at improving regulation in the sphere of international trade and customs - the "Road Map".

The Ministry of Economic Development was appointed to be responsible for the Road Map's implementation.

The Road Map consists of 40 measures which must be taken. The measures are aimed at the reduction of bureaucracy and

the quantity of documents required for customs clearance, shortening timeframes for customs operations and converting to electronic documentation.

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Local Initiatives Aimed at Improving Russia's Ranking for Global Trade (2)

Parameter Actual (2013) Target (2018)Number of documents required for customs clearance

10 4

Average number of days required to prepare all necessary documents

25 7

Average time required for customs clearance from the moment of a cargo's arrival

96 hours 4 hours

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Local Initiatives Aimed at Improving Russia's Ranking for Global Trade (3)

An independent measurement criteria will be officially used to assess the performance of the adopted measures – the "Doing Business" rating of the World Bank, specifically the "International Trade" index.

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Rating Started at 2012 Target for 2015 Target for 2018International trade

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TRADING TODAYIN RUSSIA Part II – Authorized Economic Operator –Runway to Customs Simplifications

Alexey AronovITCF's International Symposium

Amsterdam, 16 April 2013

WCO Background

On 2005 the WCO approved the first edition of the SAFE Framework of Standards to Secure and Facilitate Global Trade ("SAFE Framework").

This was subsequently amended in 2007, 2010 and 2012. In doing so EU member states developed a regime that will enhance the security and facilitation of international trade. The aim was to establish a set of international customs standards developed by the WCO that do not duplicate or contradict other intergovernmental requirements.

Two pillars of the SAFE Framework are:

Customs to customs network (including automated exchange of information aimed at controlling only a limited amount of cargo before it arrives).

Customs to business partnership (each customs administration will establish a partnership with the private sector to ensure the safety and security of the international trade supply chain).

Each pillar involves a set of standards.

It is unreasonable to expect that every administration will be able to implement the Safe Framework immediately. A phased approach will be required. The EU was first in that respect.

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European Background

The concept of AEO was introduced as one of the main elements of the security amendments in the Community Customs Code ("CCC") in 2005.

Detailed provisions were laid down in the amendment of the Customs Code Implementing Provisions ("CCIP") in 2006.

An AEO is defined as an economic operator who is deemed reliable in the context of its customs related operations and therefore is entitled to enjoy benefits throughout the EU.

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Who Can Become an AEO?

16 April 2013

In the European Union: In Russia:A person who, in the course of his business, is involved in the activities covered by customs legislation(Article 1, Point 12 of CCIP)

A legal entity registered under Russian law which imports goods in connection with its production or other commercial activity and exports goods from Russia (Article 85 of the Law on customs regulation)

Individuals Legal entities(Article 4 (1) of CCC)

Russian legal entity only

Manufacturers, exporters, customs brokers, agents, freight forwarders, carriers, consolidators, port operators, warehouse operators, importers etc.

Importers / Exporters only

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Comparison

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European Union: Russia:The international supply chain is viewed as a single process

Focus on a discrete identifiable entity: Russian importer or exporter

When a group of companies apply, all subsidiaries must submit applications in their countries, although the questionnaire may be completed by the parent company

A group of companies is not envisaged at all

Mutual recognition of AEO status in all EU Member States

Russian AEO status is not recognized in other CU Member States. European AEOs are not recognized in Russia

AEO programs are opened for small and medium size enterprises

Significant cost of "entry ticket"

Types of AEO Certificates

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European Union: Russia:Three types of AEO certificates: A single type of AEO certificate

AEO C – fewer customs controls except those related to security and safety; their status is not recognized in third countries outside of the EU

---

AEO S – fewer customs controls including those related to security and safety when goods move from/to outside of the EUAEO F – is entitled to all benefits available to AEO C and AEO S

Proof of Financial Solvency

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European Union: Russia:The applicant is not subject to insolvency proceedings

The applicant has provided security for customs payments to the customs authorities

The applicant has fulfilled his obligations regarding the payment of all import/export duties and taxes within three yearsThe applicant can demonstrate sufficient financial resources to meet obligations

The applicant has no negative assets

Customs Simplifications Available for an AEO in Russia

Temporary storage of goods in the premises or territories of an AEO (without obtaining the status of a bonded temporary storage warehouse).

Release of goods before submitting a customs declaration in accordance with Article 197 of the CU Customs Code.

Local customs clearance in premises or territories of an AEO, including closing the transit procedure for imported goods.

Other simplifications including a 'preliminary declaration' with the further periodical submission of a summary declaration.

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Customs Simplifications Recommended to a Manufacturing Company

Local customs clearance in the factory's warehouse. Immediate release of goods upon each truck or container arriving at

the factory's warehouse, before submitting a customs declaration. Periodical filing of a summary customs declaration for all goods

delivered at the factory's warehouse.

* * * Raw materials, parts, components: All the abovementioned

simplifications apply to materials imported for production purposes. Finished products: Importer will not be able to bill clients (issue

factura-invoices) for finished products before obtaining a customs declaration number. Nevertheless such products can be resold and can physically leave the AEO's warehouse before the periodic declaration is filed.

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Benefits for Manufacturing Company

Direct benefits No need to deliver imported goods to a customs terminal – they go directly to

the AEO's warehouse (the AEO will save time and logistical expenses). Immediate release of goods upon their arrival which may enable the importer

to reduce its trade stocks by switching to the 'just in time' supply model. Reduction of man-hours and, as a result, customs brokerage fees owing to

filing a periodic declaration once a few days later, replacing a number of regular declarations each day.

Regulations that establish places of customs clearance for certain categories of goods do not apply to the AEO.

Indirect benefit Obtaining AEO status will increase the customs rating of the company which

may result in the appliance of fewer physical and document-based controls for imported shipments.

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How Much Is the Security for Customs Duties and Taxes for an AEO in Russia

EUR 150,000 - for an AEO involved in the production or export of goods

EUR 1,000,000 – for all other AEOs_____________An AEO is deemed 'involved in production' if such AEO (i) has production facilities (either owned or rented or in operation) or (ii) performs manufacturing activities itself.An AEO is deemed 'involved in export' if (i) its annual export volume is at least EUR 500,000, and its annual number of export operations exceeds 12 (excluding goods subject to export customs duties).

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How Can Customs Duties Be Secured in Russia?

By a cash deposit. By a pledge of property (except foreign property, stocks, and

certain other categories of property); this is currently not possible in practice, as the customs authorities do not sign pledge agreements.

By a non-returnable bank guarantee issued by a Russian bank included in the register of banks (Order of the FTS 2117 of 19 October 2012), whose guarantees are acceptable for the Russian customs authorities (maximum 36 months).

By a third party guarantee – on the basis of a guarantee (suretyship) agreement; this is currently not possible in practice as the Russian government has not established the criteria for a guarantor, as required by Article 146 (4) of the Law on Customs Regulation.

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Other Requirements for an Applicant

An applicant must have: More than a year's experience in international trade. No debt in respect of customs duties, taxes, or late penalties. A clear record regarding administrative offences in the customs

sphere (no administrative offences related to a violation of customs law for one year prior to the application).

A satisfactory system of managing commercial, accounting and transport records which allows appropriate customs controls.

No criminal records in respect of the AEO head and employees involved in customs operations.

Premises and territories owned, rented or in operational control.

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16 April 2013

Unloading

Loaded

AEO consignee warehouse

EmptyCustoms

Bor

der

AEO notifies the customs 3 hours prior to the goods' arrival

unloading is only forbidden if the customs authority wishes to inspect the goods

Customs stamp for completion of the transit

procedure

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Steps for Obtaining AEO Status

Step 1. Internal customs audit as preparation for the field check by the customs authorities (30 days, can be done in parallel with Step 2).

Step 2. Preparing an application and collecting supporting documents (in practice approximately 60 days).

Step 3. Submitting the application and supporting documents to the Federal Customs Service. Step 4. The FTS delegates the performance of a field check to the local customs authority (10

days from the date the application is received by the FTS). Step 5. The local customs authority issues a decision regarding a field audit of the applicant (in

practice approximately 30 days from step 4). Step 6. Field Check (60 days plus an optional 30 days to eliminate incompliances). Step 7. The local customs authority issues an act upon the results of the field checks and

sends it by mail to the FTS. Step 8. The applicant and the local customs authority make necessary arrangements regarding

cooperation procedure, documents turnover, negotiate a draft of cooperation agreement.

Step 9. The FTS takes a preliminary decision and notifies the applicant accordingly. Step 10. Within 30 days the applicant provides the FTS with documents evidencing the security

for customs payments. Step 11. The FTS enters the applicant in the AEO Register and issues a certificate. Step 12. The applicant and the customs authority sign the cooperation agreement specified in

Step 8. Step 13. The AEO certificate enters into force 10 days after its date of issue. 16 April 2013 24

Cooperation Agreement with the Customs Authority

The standard form of the cooperation agreement is established by Order No. 1914 of Federal Customs Service of 20 September 2011. The final text is negotiable.

Termination of the cooperation agreement will result in the suspension of the AEO certificate.

The termination provisions of the standard form refers to a closed list of situations where the customs authorities may unilaterally terminate the agreement.

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Indirect Benefits of Obtaining AEO Status

The Federal Customs Service shall introduce a "trustworthiness rating" which will be assigned to each importer/exporter.

Such rating will depend on many factors, each of them will amount to a certain 'score'.

It is expected that obtaining AEO status will increase such rating significantly.

Fewer physical and document-based controls will be applied to those importers/exporter with a high rating.

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DLA Piper - Facts and Figures

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Contact Information

16 April 2013

Alexey AronovLegal Director

T: +7 495 221 4403alexey.aronov@dlapiper.com

DLA Piper Rus LimitedLeontievsky pereulok, 25Moscow, 125009, RussiaT: +7 495 221 4400F: +7 495 221 4401

www.dlapiper.com

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