Moscow is named the absolute leader in the use of offset contracts in Russia

22.07.2021

You & Partners experts analyzed the mechanism of the offset contract, comparing it with other investment mechanisms that are used in Russia: concession and public-private partnership agreements, life cycle contracts, special investment contracts and investment protection and promotion agreements. You & Partners associates also analyzed foreign experience in the application of offset contracts. Based on the study it was concluded that internationally offset contracts are used predominantly in the area of defense contracts. In contrast to the international practice, in Russia it is applied for the creation of regional industrial productions.

Moscow has confirmed its status as the absolute leader in the application of offset contracts, having concluded more than 80% of the total volume of offset contracts in Russia. With the use of offset contracts Moscow ensured the purchase of products worth about 73 billion rubles in exchange for investors’ obligations to invest almost 13 billion rubles in the city’s economy. Moscow's leadership is explained not only by the huge volume of the market, but also by the special attention of the city authorities to the subject of offset contracts, including the development of a regulatory framework clarifying certain provisions of the federal legislation. The creation of a transparent regulatory environment is one of the key criteria for successful cooperation of the public and private partners.

Despite the fact that offset contracts are not yet widespread in other regions of Russia, this instrument seems attractive for both the investors and the public parties. Offset contract makes it possible to implement the production of technically complex products, ensure their localization in Russia and provide the investor with a market for these products for the period of up to 10 years. Also as a result of the amendments adopted in July 2021 the scope of the offset contract was extended to the provision of services. This may contribute to an additional increase in demand for this mechanism.

The public side of the offset contract benefits from obtaining additional income (increase in the taxable base). At the same time, the public party does not incur costs at the investment stage of projects implemented with the use of offset contracts.

According to the authors of the study, offset contracts can become more popular if the entry costs for the mechanism (currently the required investment volume is 1 billion rubles) is reduced.

You & Partners associates emphasize that the spheres in which offset contracts can be implemented are not legally restricted. Nevertheless, 4 out of 6 contracts implemented in Russia worth over 35 billion rubles are concluded for supplying pharmaceutical products.

Machinery, transport, production of complex technical equipment, energy and household waste recycling may become promising directions for implementation of offset contracts.

As noted by Evgenia Zusman, You & Partners managing partner, "investment mechanisms introduced by the legislation on public procurement are gradually encroaching on PPP mechanisms. Contracts that allow the conclusion of a contract for the supply of works/provision of services throughout the life cycle of a project (CSC) or provide an investor with a supply market for its products (goods and services) (offset) are gaining in popularity. In the texts of the contracts themselves there are mechanisms that have been tested and successfully used in PPP projects (e.g., special circumstances). This expands the palette of contractual mechanisms that may be used for investment projects, which is very pleasant. Offsets should be popularized and developed. We should lower the entry threshold for investors, expand law enforcement practice and so on. But all this will not work without creating a comfortable infrastructure for productive interaction between investors and regions. That is why it is really worth paying attention to the experience of Moscow".

More information on the application of offset contracts is available here (the article is available in Russian).

You & Partners Press Service

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