Environment, energy efficiency and renewables

Over the past years, Russia has adopted complex environmental legislation that is generally in line with commonly accepted international standards.

Its practical implementation, however, remains limited due to the general character of regulations and the inconsistent application of the corresponding penalties. This forces the legislator to develop the respective regulations further with clearer commitments and a more transparent system of liabilities and sanctions.

The development of Russian environmental legislation in close connection with other relevant sectors is also driven by the desire to incentivise Russian-based production and therefore support the so-called “localisation” trend (please see the Import substitution and localisation chapter).

For example, on 30 June 2015, a new Federal Law on industrial policy¹ (the “Industrial Policy Law”) entered into force, setting out the main principles that govern specific incentives intended to support the development of industrial production in Russia. The law includes specific support to be granted to projects involving the use of so-called “best available technologies” (“BATs”), which are closely linked to the implementation of environmentally efficient solutions.

Notwithstanding these incentives, investment in environmentally efficient technology in Russia remains low in comparison to developments in the rest of the world. This is due to regulatory constraints as well as to a lack of public awareness and understanding of environmental issues.

Legislation on environmental protection

The main federal law setting out the fundamental principles of environmental regulation in Russia is Federal Law No. 7-FZ dated 10 January 2002 “On Environmental Protection” (the “Environmental Protection Law”). The Environmental Protection Law provides for an overall framework for environmental management and imposes general requirements related to the construction and operation of various facilities that may be harmful to the environment.

Types of environmentally dangerous facilities

The Environmental Protection Law classifies facilities depending on the level of their environmental pollution and indicates which methods of state control are applicable to each category of facility, as follows:

The criteria to classify facilities are currently established by Government Decree No. 1029 dated 28 September 2015.

Only facilities of categories I and II are subject to an obligation to meet the requirements of maximum allowable emission and discharge values.

Environmental fees relating to emissions, discharges and waste management

The environmental fees (pollution discharge fees) are calculated for each waste ingredient and pollution type depending on the level (volume or weight) of the danger they pose to the environment and public health.

The following activities are subject to environmental fees:

• the emission of polluting substances into atmospheric air by stationary sources;
• the discharge of polluting substances into bodies of water; and
• the storage and burial of production and consumption waste.

The corresponding environmental fee structure is calculated depending on the following elements:

• pollution within the permissible norms and established limits;
• application of an increasing coefficient for certain regions and environmental facilities based on ecological factor;
• application of an increasing coefficient for the above-limit discharge (x25 for waste, and x25 or x100 for other polluting substances depending on the facility’s category); and
• application of an incentive system (reducing coefficients down to x0 or increasing coefficients up to x100 depending on the application of environmentally friendly technologies and BATs, implementation of measures and plans aimed at reduction of pollution, etc.).

In addition, on 22 April 2016, a Government Decree² setting the rates of the environmental fee relating to the management of production and consumption waste came into force. Such environmental fee must be paid by goods manufacturers and importers who fully or partially fail to perform their waste management obligation by not meeting the established compulsory recycling targets³. The list of goods, in respect of which this environmental fee is payable, is quite broad and contains 54 types of goods including textiles, paper products, petroleum products, plastic products, batteries, computers, communications and electrical equipment. The environmental fee rates are set in Russian roubles for each ton of the product and/or packaging to be recycled and range, for example, from RUB 2,025 (EUR 29⁴) for accumulators to RUB 33,476 (EUR 478) for rechargeable batteries.

“Waste reform”

On 1 January 2019, the so-called “waste reform”⁵ was launched in Russia.
Its main goals are to organise the process of household waste treatment, including its disposal, and to implement the separate collection of such waste.

To this end, each region⁶ has to implement the following measures:

• prepare and approve a regional waste treatment scheme;
• select a regional operator responsible for the waste treatment process in the relevant region;
• set regional waste treatment tariffs payable by all entities and individuals generating waste;
• build waste sorting and processing facilities; and
• implement a separate waste collection system. 

As of 1 January 2020, most regions of Russia approved waste treatment schemes, selected regional operators and set relevant tariffs.

However, in many cases, regional operators are suffering from insufficient and irregular financing and lack of available facilities. The adopted regional waste treatment schemes are not always well developed and usually require additional revisions.

There is room for improvement in this sphere, which, notwithstanding the above, remains attractive for potential investors. This is particularly true for the creation of the required infrastructure (e.g. waste sorting and processing plants; waste collection and transporting vehicles and equipment) and the implementation of separate waste collection systems in the regions. 

Setting emission quotas

On 1 January 2020, the Russian Government launched an experiment on setting emission quotas⁷.

The experiment will be carried out in 12 industrial cities of Russia until 31 December 2024.
The ultimate goal of the experiment is to reduce atmospheric air pollution.

At the first stage, the authorities will:

• adopt a complex plan of measures for the reduction of emissions in each city; and
• prepare summary calculations in order to identify the main pollutants and facilities emitting such pollutants.

Thereafter, the quotas will be set for the above facilities, and entities or individuals operating them will bear additional obligations to limit emissions in order to meet the set quotas and regularly report to the supervising authorities.

Sanitary protection zones

The regulation of sanitary protection zones (“SPZs”) in Russia has always been deficient. For a long time, the relevant provisions on SPZs have been provided by the sanitary and epidemiological rules (“SanPiNs”), but these did not contain comprehensive regulation.

According to Federal Law No. 342-FZ⁸, all estimated or preliminary SPZs established earlier will cease to exist by 2022, and all SPZs will be established in accordance with the new rules.

From 1 January 2022, SPZs and the related restrictions will be deemed to be created from the date of their registration in the Unified State Register of Immovable Property.

Government Decree No. 222 dated 3 March 2018 further provides that SPZs must be established in relation to facilities which have a chemical, physical or biological impact on humans and the environment (“Hazardous Facilities”).

It is expressly prohibited to use the land plots located within the boundaries of an SPZ for the following purposes:

• building residential real estate, educational and medical units, children’s recreation organisations, open-air sports facilities, recreation and gardening zones;
• setting up food, pharmaceutical or drinking water production facilities, if the quality of the relevant products may be affected by neighbouring Hazardous Facilities;
• building or refurbishing capital structures if their permitted use does not comply with the restrictions established within an SPZ.

Any person affected by an SPZ is entitled to arrange for necessary measurements to be effected and submit an application for reducing the SPZ without the consent of the owner(s) of the relevant land plots or Hazardous Facilities. Previously, any changes to an SPZ initiated by third parties were subject to such consent. This change is supposed to intensify the land development process.

Industrial policy legal framework

In line with the shift towards an import substitution model for the Russian economy, the Industrial Policy Law prioritises regional development and favours Russian-based manufacturers. This forces international investors to change their business models by favouring industrial production within Russia.

For example, the Industrial Policy Law expressly introduced preferences for Russian-based production with priority for goods produced in Russia for public procurements.

However, given the framework nature of the Industrial Policy Law (meaning that its general principles and provisions are implemented through other laws and secondary legislation), this preferential regime is applicable to specific areas such as military equipment, vehicles, medical equipment, pharmaceutical products and certain types of food products.

Special investment contracts

The Industrial Policy Law created a new contractual framework for projects in the industrial sector by introducing the concept of special investment contracts (“SPICs”). Under such contracts, investing companies that undertake to implement investment projects will be guaranteed long-term incentives by the Russian State.

What mainly distinguishes SPICs from other contractual arrangements formalising public-private partnerships is that the state does not contribute budgetary funds or state-owned property to the relevant project.

The cost of these state incentives is expected to be offset by the anticipated positive economic effect for the state in the form of new infrastructure, jobs and taxes being paid by new businesses.

New rules for entering into SPICs (so-called “SPIC 2.0”) were adopted by Federal Law No. 290-FZ “On Amendments to the Federal Law on Industrial Policy regarding the Regulation of SPICs”⁹. In particular, these new rules provide for the following:

• SPICs are available only to those investors who intend to introduce modern technologies (as indicated in a list to be approved by the Russian Government).
• A SPIC has to be entered into through a tender process initiated by the public party or the investor itself. As a general rule, this will be in the form of an open tender. However, if the project relates to military, special or double-purpose technologies, a closed tender will be organised.
• A SPIC is implied to be a contract between (i) the investor; (ii) the Russian Federation; (iii) the relevant Russian region; and (iv) the relevant municipality where the project is intended to be implemented.
• The duration of a SPIC will depend on the volume of investments, but will not exceed 20 years.
• The previous minimum investment threshold (RUB 750m, i.e. EUR 10.7m) is no longer applicable.
• One SPIC may only be concluded with one investor. This differs from the previous rules (“SPIC 1.0”). Under SPIC 2.0, it is no longer possible to add other participants on the investor’s side (such as co-investors, involved parties) who could also qualify for government support measures.
• The total amount of financial state support under a SPIC may not exceed 50% of the total investment required by such SPIC. If this limit is exceeded, the provision of state support measures to the investor is suspended.
• The main tax benefit for a SPIC participant remains the income tax rate of 0% to be paid to the federal budget and the possibility of reducing its regional component down to 0%.
• SPICs that were concluded under the “SPIC 1.0” rules remain in force. Such SPICs can be amended or terminated by the parties on the basis of the laws then existing at the time of their conclusion. However, it is not possible to enter into a new SPIC under the previous regime.

The new SPIC 2.0 regime is aimed at increasing the transparency of the procedure and introducing a number of positive aspects in the regulatory framework. However, lack of required secondary legislation, which was initially meant to be adopted by the end of 2019, prevents all parties from implementing investment projects under the new regime. Secondary legislation is expected to be adopted in the second quarter of 2020.

Currently, there is another draft of a federal law aiming to regulate the conclusion of agreements affording support to investments in the Russian Federation. This draft bill introduces a new type of agreement – on the promotion and protection of investment (“SZPK”). Unlike SPICs, SZPKs are supposed to be used not only in production-based industries, but also in other sectors such as services, intellectual property, infrastructure. It also provides for a less formal contract conclusion process – by just filing a declaration on the implementation of the investment project.

Since this bill has not been adopted yet, it is difficult to forecast how SPICs and SZPKs will coexist.

Incentives

The Industrial Policy Law introduced the following incentives for the industrial sector:

• financial support in the form of various subsidies (for R&D expenditures and for the development of industrial infrastructure) to be granted on the basis of tenders, with priority being given to projects involving the use of BATs (please see next section for more details);
• refinancing of loans and access to long-term loan financing on competitive terms¹⁰;
• various types of tax incentives, such as special incentives to be provided until 2025 for some investment projects that have been duly approved by the Russian Government¹¹; and
• creation of dedicated state funds to stimulate industrial development (by way of loans, grants, equity participation in project companies, leasing, etc.).

BATs

The concept of BATs was introduced by Federal Law No. 219-FZ dated 21 July 2014 but only entered into force to the full extent on 1 January 2020. To date, several relevant Government Decrees and Ordinances have already been adopted on the applicable list of industries¹², BAT qualification and BAT handbooks¹³, etc.

The criteria for a technological process, technological method or equipment to be considered as a BAT generally include the following:

• minimal level of negative environmental impact;
• cost efficiency of implementation and operation;
• use of resource-efficient and energy efficient methods;
• implementation period; and
• industrial introduction at two or more enterprises impacting the environment in Russia.

A list of industry-specific BATs is provided in 51 specialised handbooks, which have been developed by a BAT Bureau created in January 2015 and adopted by Rosstandart.

In terms of incentives, starting from 1 January 2020, manufacturers who implement BATs do not have to pay environmental fees for emissions and discharges (if within the permissible norms). Moreover, companies shifting to BATs are eligible for financial support through a special fund granting loans for modernisation purposes.