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The Development Path for Petrochemicals in the East: Projects, Support Measures, Drivers of Growth
4 September 2019
15:00—16:30
KEY CONCLUSIONS
The Far East has a great potential in petrochemistry due to their proximity to APR markets and availability of resources

Nowadays, petrochemistry is gaining momentum both in the world and in Russia <...> This area is growing faster than GDP. The proximity to the Asia Pacific market is of great importance for the development of petrochemistry in the Far East. <...> Industry leaders are concentrated in this region — Anastasiya Nabatchikova, Head of Director Petrochemicals, Far East Investment and Export Agency.

Our country <...> is very promising in terms of growth. At the same time, the Far East has an obvious advantage due to its proximity to the fast-growing Asian market — Marina Belyakova, Partner, EY.

Government support for petrochemistry is vital

The rate of return for such projects is 10+ years. Due to the giant CAPEX [Capital Expenditure, – Ed.] that needs to be invested, we also need a high margin. <...> In order to utilize this money, there must be confidence that the fiscal regime will be maintained for a long period of time. We need an adequate cost of financing, and in the absence of cheap money we need to create preferences for investors. <...> Here the government’s fiscal policy comes into play. Swinging between extreme options has a devastating effect on the investment climate — Pavel Sorokin, Deputy Minister of Energy of the Russian Federation.

When you mention that the project is located in an ASEZ [advanced special economic zone, – Ed.], it automatically covers all the disadvantages — Anastasiya Nabatchikova, Head of Director Petrochemicals, Far East Investment and Export Agency.

ISSUES
International competition getting stronger

Demand for petrochemicals is growing by 5–7% per year and will continue to be on the rise at a similar rate in the foreseeable future. But it is not just us who see it – everyone sees it, and therefore the capacities being put into operation around the world will lead to a margin decrease in the foreseeable future — Pavel Sorokin, Deputy Minister of Energy of the Russian Federation.

Fairly big capacities are being put into operation in the USA and in the Middle East, where the cost of raw material is fairly low — Marina Belyakova, Partner, EY.

The need for retrofitting and upgrading the industry

Requirements and regulations that the government has introduced as a tightening measure are one of the motivations. <...> Petrochemical companies need to retrofit and reduce emissions. <...> Without petrochemicals, it is impossible to improve the environment in the regions, because in cities with a population of over 1 million people, the main air pollutant is motor vehicles and maintenance-related facilities. <...> We have the opportunity to switch to products that address these issues — Mikhail Sutyaginskiy, Chairman of the Board, Titan.

We need advance projects in gas and oil refining in order to develop of our industry in the Far East — Dmitry Konov, Head of the Administration of the Gusevsky City District Municipal Structure.

Instability of Russian legislation

If we change the rules of the game in the middle of a project's payback period or lifetime, it does not just affect the investor who was merely unlucky, but all investors in general. Nothing is worse than changing the rules of the game halfway — Pavel Sorokin, Deputy Minister of Energy of the Russian Federation.

SPIC 2.0 [the law on special investment contracts, – Ed.] means there was SPIC 1.0. It means that the legislation is far from being stable — Marina Belyakova, Partner, EY.

SOLUTIONS
Introducing new mechanisms of government support

I would like to draw the attention of potential and existing investors to two important mechanisms being introduced. First of all, these are corporate programmes, Government Decree No. 195, opportunity to access discounted credit tools with a subsidized interest rate for the companies that are ready to make a technology-savvy competitive and export-oriented product. This mechanism is already effective, and now the projects are going through the first round of selection for it. The second mechanism is SPIC 2.0. All decisions about it have been made. Let me remind you that the main requirement is the following: it is either a deed of transfer or creation of a new technology or making a high-tech product. In this case, we can be eligible for the measures stated: a possibility of zeroing profit tax or property tax or transport tax. While unlike SPIC 1.0, the special investment contract must be approved and signed by four parties: the ministry, the region, the municipality and the investor — Viktor Evtukhov, State Secretary and Deputy Minister of Industry and Trade of the Russian Federation.

At the end of the last session, we adopted a law that zeroed the personal property tax, and we hope that production will be developing at a high pace. At the end of the spring session, we adopted the federal law on the industrial policy of the Russian Federation in terms of regulating special investment contracts that stimulate the development of the industry — Andrey Kutepov, Chairman of the Federation Council of the Federal Assembly of the Russian Federation on Economic Policy .

Over the last year, the law on protecting investment and capital has stirred a lot of discussion. It is fairly simple: the whole regulatory environment for investment is fixed for up to 20 years depending on its size. No changes to taxes, import or export duties, and sometimes tariffs — Grigory Berezkin, Chairman of the Board of Directors, ESN Group .

Long-term government planning

The challenge for the government and those authorities that create conditions for business development is long-term planning for 25 years and more, so that all business players could feel the confidence and the sustainability — Kirill Molodtsov, Aide to the Chief of Staff, Presidential Executive Office .

As of today, there is a strategy for the industry development for up to 2030. Its objective is to raise refining volumes. We are in close touch with the Ministry for the Development of the Far East and the Far East Development Corporation to develop petrochemical clusters, because the region has a quite a few big players that take refining to a whole new level — Anastasiya Nabatchikova, Head of Director Petrochemicals, Far East Investment and Export Agency.

The material was prepared by the Russian news agency TASS