Russia Backtracks on Trade Zone Pact

Korean businesses planning to make inroads into the Russian Far East region were expecting a continuance of incentives and privileges promised by a treaty regarding construction of a joint industrial complex in Russia`s free economic zone Nakhodka. The treaty was signed between the Russian government and the Korean government in May 1999.

According to the treaty, Korean companies operating in the industrial complex are allowed to get a tariff exemption and an additional tax refund on the imports and exports along with other incentives offered exclusively to overseas companies in Russia.

Although the Korean National Assembly ratified the treaty in December 1999, the Russian Federation Council has been opposing the treaty. The Federation Council has been putting off the ratification of the treaty claiming that it may give excessive privileges to Korean firms.

The Korea Land Corporation was planning to make an industrial complex by renting the land for free from Nakhodka for 49 years for Korean companies. However, the plan couldn’t have been carried out due to a worsened corporation environment.

The Federation Council’s escalating opposition made the Russian government enact the Special Economic Zone (SEZ) bill in July 2005. The bill stipulates a contraction of special benefits provided to businesses in Nakhodka.

In addition, according to the bill, companies operating in the Technology Special Zone which offers the most extensive benefits also have to pay export duties. The SEZ bill also demands companies operating in special zones to pay an additional tax for products sold outside the special zone.

In the meantime, the Russian government is expected to revise the bill next month and designate Nakhodka as a Port Special Zone which offers the least benefits among the special zones to international companies.

If it is turned into a Port Special Zone, Korean companies running businesses in Nakhodka will no longer get tax benefits like a tariff and additional exemption.

“Russia abrogated treaties it singed with foreign countries during the 1998 financial crisis and has come up with the Special Economic Zone bill which rearrange special economic districts. Benefits for foreign companies will continue to disappear in Russia,” said Moscow regional director of LG Chem who has been searching for a site for a factory in Russia.

viyonz@donga.com