Legal Supply Schemes for Importing Goods into Russia: A Comprehensive Guide

 

December 29, 2023

BRACE Law Firm ©

 

Current political and economic realities have forced foreign partners to adjust their trade interactions. However, despite imposed prohibitions and restrictions, the demand for goods remains high, and entrepreneurs continue to find ways to import necessary products.

Under a supply contract, a supplier-seller engaged in business activities undertakes to deliver, within a specified timeframe, goods it produces or purchases to a buyer for use in business or other purposes not related to personal, family, household, or similar use.[1] Delivering goods under foreign trade contracts involves an interaction mechanism not only between foreign partners but also logistics companies and insurance providers; it also requires customs clearance and legal support. A supply scheme represents a method of interaction between a supplier and a buyer that complies with established legal norms, resulting in the transfer of title from one foreign trade participant to another. In practice, several supply schemes for importing goods are commonly used.

Direct Contract with a Foreign Supplier

One of the simplest interaction schemes between a supplier and a buyer is the direct scheme. This approach involves a minimal number of participants, partners interact directly without intermediaries, and the parties independently conclude a foreign trade contract. Generally, this interaction scheme consists of several stages:

• Determining key supply conditions, including the logistics chain, and concluding a foreign trade contract;
• Making a prepayment from the importer’s bank account to the supplier’s settlement account in the established manner and amount;
• Shipping the goods to the buyer or transferring the goods to a transport company;
• Customs clearance and payment of customs duties and fees, calculated based on the actual value of the goods;
• Acceptance of the goods and final payment;
• Signing closing documents.

When interacting with a foreign partner, the parties may supplement, change, or exclude terms of the foreign trade contract, which often depends on the agreements reached between the participants in the international transaction. Despite the simplicity of direct interaction, each foreign trade contract requires individual development.

The advantage of this scheme is the direct contact between the seller and the buyer without intermediaries, allowing them to interact and agree on necessary terms directly. However, this scheme requires the parties to consider all specifics of foreign trade contracts for the supply of particular goods. Often, a direct foreign trade contract is suitable for experienced foreign trade participants who understand the intricacies of supplying specific goods and possess legal knowledge in international trade.

This interaction scheme is not suitable for novice foreign trade participants due to the extensive specific knowledge required to conduct such a transaction with minimal risks.

Agent Supply Scheme

A variety of interaction schemes allows a large number of entrepreneurs to enter the foreign trade market. At the same time, not all entrepreneurs wish to become foreign trade participants but still want to conduct trade with foreign partners. In such cases, they use an intermediary interaction scheme, such as an agent supply scheme. In this scheme, an intermediary becomes an additional participant in the foreign trade transaction, without whom many transactions might not occur at all. This import scheme is often used by novice foreign trade participants or those who import goods on an irregular basis.

Under Russian law, an agent undertakings, for a fee, to perform legal and other actions on behalf of another party (the principal) on the instructions of the principal, either in the agent’s own name but at the principal’s expense, or in the name and at the principal’s expense. [2]

The agent import scheme involves delivering goods according to the following algorithm:

• The buyer selects the goods, agrees on the transaction terms, and concludes a contract with an agent who purchases the required goods for the buyer;
• The agent concludes a foreign trade contract with the seller of the goods;
• The buyer pays the agent for the cost of the goods, all delivery-related expenses, and the agent’s services;
• The agent performs all necessary actions related to paying the seller, delivering the goods, and customs clearance;
• The agent transfers the goods to the buyer.

Depending on the terms of the contract, the algorithm for the agent supply scheme may vary. Since this interaction involves a third-party agent in addition to the seller and the buyer, the parties must carefully define all necessary conditions in both the foreign trade contract and the agency agreement. The terms of the agency agreement and the foreign trade contract concluded by the agent must be compatible.

When implementing an agent supply scheme, the agent performs the following functions:

• Searching for the required goods, selecting a supplier on terms favorable to the buyer, conducting negotiations, and determining all terms of the foreign trade contract, including all transaction costs (logistics, customs payments, and agent fees);
• Conducting counterparty due diligence;
• Handling the processing of customs, shipping, and licensing documents for delivery to the buyer;
• Monitoring the delivery of goods to the buyer.

The advantages of importing goods under an agency agreement include:

• The ability to delegate all primary tasks to an agent and receive the delivered goods with all necessary documentation and completed customs procedures;
• Since the agent handles most tasks related to interacting with the seller, the risks associated with such a supply are minimized.

While the agent import scheme significantly simplifies foreign trade for the buyer, it also has disadvantages, such as:

• High expenses for implementing the foreign trade supply contract;
• Difficulty in identifying the responsible party for the performance of the transaction (e.g., determining the party against whom to file a claim regarding the quality of the supplied goods);
• Risks related to the agent’s choice of supplier, logistics, etc.;
• Conclusion of a template agency agreement that does not provide for all the specifics of a particular transaction;
• Potential misunderstandings with regulatory authorities who may not fully grasp the nature of agency agreements.

Regarding the difficulty of identifying the responsible party, the Civil Code of the Russian Federation provides that rights and obligations arise directly for the principal under a transaction performed by an agent with a third party in the name and at the expense of the principal.

Despite the advantages and disadvantages of an agent interaction scheme, to achieve a positive result in a foreign trade transaction, the parties must define all supply terms and reflect them in both the agency agreement and the foreign trade contract to prevent misunderstandings among all participants.

Supplies by Trading Houses with VAT Refund

Another interaction scheme for importing goods is supply through trading houses, which act as intermediaries and foreign trade participants. Trading houses may sell their own goods, provide intermediary services, or combine both for their clients.

Trading houses purchase goods, potentially in large batches, and resell them in their own name within Russia, in smaller batches if necessary. Supply through a trading house is carried out as follows:

• The buyer concludes a contract with a trading house for the supply of goods;
• The trading house, in turn, concludes a foreign trade contract with the supplier and pays for the goods;
• The goods are delivered and cleared in the trading house’s country;
• In a transit zone, the goods are reassigned to the buyer;
• The cargo is sent to the buyer.

In Russia, "trading house" is not a specific legal form of organization. To provide export-import services, the entity must be registered as a legal entity, and an LLC is frequently used for this purpose.

A trading house acts as an importer, exporter, and trader in the purchase and sale of goods in foreign trade.

The advantages of delivering goods through trading houses include:

• The trading house performs most import tasks and interacts with the supplier;
• The trading house ensures the procurement of goods;
• The buyer may purchase goods at reduced prices due to the large orders placed by the trading house, as suppliers often provide additional discounts in such cases;
• The trading house handles the customs clearance of imported goods in compliance with legal requirements;
• It becomes possible to import sanctioned goods and goods from unfriendly countries.

Most trading houses maintain a large staff that accompanies the goods at every stage of the supply, contacts customs and tax services as needed, and promptly resolves arising issues.

Furthermore, since trading houses handle a large volume of diverse transactions with suppliers from different countries, they can manage their foreign currency reserves and minimize the adverse effects of exchange rate fluctuations.

There are several types of trading houses:

• Vertical: the company sells goods it produces independently;
• Horizontal: the company sells goods produced by various manufacturers;
• Monobrand: the company sells goods of only one brand.

When choosing a trading house for future cooperation, one should:

• Review the trading house’s capabilities regarding both product assortment and financial support;
• Study the trading house’s reputation;
• Examine the terms of interaction with the trading house;
• Compare the working conditions and capabilities with other trading houses.

Customs Clearance through an Authorized Economic Operator

The availability of different import schemes allows a buyer to choose the most suitable mechanism. Regulations provide for the delivery of goods through an Authorized Economic Operator (the "AEO").

Under the EAEU Customs Code, an AEO is a legal entity created in accordance with the laws of the Member States and included in the register of Authorized Economic Operators upon fulfillment of established conditions.[3] When a legal entity is included in the AEO register, it receives a certificate of inclusion.[4] The procedure for suspending, resuming, and terminating the certificate, as well as excluding legal entities from the register, is defined by the Order of the Ministry of Finance of Russia No. 49n dated March 29, 2019, On the Approval of the Procedure for Suspending and Resuming the Certificate of Inclusion in the Register of Authorized Economic Operators, Excluding Legal Entities from the Register of Authorized Economic Operators, Forms of Decisions to Suspend, Resume, or Exclude a Legal Entity from Said Register, as well as cases where these decisions are made automatically by customs authorities.

The specifics of performing individual customs operations and conducting customs control, applied depending on the type of AEO certificate, are referred to as special simplifications.[5]

A certificate of inclusion in the register of Authorized Economic Operators [6] can be of three types:

1. A first-type certificate entitles the AEO to the following special simplifications:

• Performance of customs operations related to the arrival of goods in the EAEU, departure from the EAEU, customs declaration, and release of goods on a priority basis;
• Exemption from providing security for the payment of customs duties, taxes, and special, antidumping, or countervailing duties when placing goods under the customs transit procedure where the AEO is the declarant;
• Exemption from providing security for the payment of customs duties, taxes, and special, antidumping, or countervailing duties upon the release of goods where the AEO is the declarant, subject to the specifics provided by the EAEU Customs Code;
• Release of goods prior to filing a customs declaration;[7]
• Conducting customs control in the form of a priority customs inspection or physical examination;
• Recognition by customs authorities of seals[8] affixed by the AEO to the cargo compartments of vehicles or parts thereof as means of identification;
• Exemption from the requirement to establish a transit route for goods transported by the AEO;
• Priority participation in pilot projects and experiments conducted by customs authorities aimed at reducing time and optimizing customs operations;
• The ability for an AEO carrier to perform unloading, reloading, and other cargo operations with goods under customs control being exported from the EAEU without customs permission or notification (except for transit goods), including replacing international transport vehicles and removing seals.

2. A second-type certificate entitles the AEO to the following special simplifications:

• Temporary storage of AEO goods in the AEO’s buildings, premises, and open areas;
• Temporary storage of goods belonging to persons who are not AEOs in the AEO’s facilities if permitted by the laws of the Member States;
• Delivery of goods to a customs control zone created at the AEO’s facilities, their placement there, and the performance of customs control and operations related to the completion of the customs transit procedure;
• Conducting customs control at the AEO’s facilities;
• Performing customs operations related to declaration and release at a customs office different from the one where the goods are located, provided both are in the same Member State;
• Priority customs inspection or physical examination;
• Application by the AEO of identification means used by customs authorities in a specific manner;
• Exemption from providing security for customs duties and taxes upon release where the AEO is the declarant;
• Release of goods prior to filing a customs declaration;
• Exemption from providing security for import duties when granting a deferral, provided the AEO is the declarant.

3. A third-type certificate entitles the AEO to the special simplifications provided for both the first and second types of certificates.

Additional simplifications are defined by the Decision of the Council of the Eurasian Economic Commission No. 114 dated July 15, 2022, On Determining a Special Simplification Provided to Authorized Economic Operators, which allows holders of second or third-type certificates to mark foreign goods under temporary storage with identification means without customs permission, unless otherwise established by EAEU laws. However, there are specific cases and categories of goods to which individual simplifications do not apply. [9]

Based on these legal norms, an AEO is granted the following rights:

• Priority customs inspections;
• The ability to conduct preliminary customs declaration;
• Temporary storage of goods under customs control without listing them in the relevant registers;
• Release of goods before filing a declaration with the authorities;
• Conducting various customs operations with cargo at AEO warehouses, etc.

Import Delivery by Contract Broker

Delivery through a contract broker is a service where a broker purchases specific goods, makes payment, and delivers the goods to the customer. The algorithm for importing goods under this scheme is as follows:

• The broker purchases goods from a foreign supplier upon the client’s instructions;
• The broker handles customs clearance, logistics, and payment;
• The broker transfers the paid and customs-cleared goods to the buyer.

The contract broker scheme is used when:

• The buyer does not engage in foreign trade;
• A one-off supply is planned;
• A test purchase is being conducted.

Individuals may also use this import scheme, provided the imported goods could be recognized by customs authorities as purchases for commercial purposes.

Importantly, some companies using the contract broker scheme undervalue the goods to reduce customs value. While this may seem beneficial for the customer, it leads to tax evasion. Given modern technical capabilities, detecting the undervaluation of customs value is straightforward for regulatory authorities, which may subsequently result in administrative or even criminal liability. [10]

To avoid participating in schemes involving customs undervaluation, a customer must carefully choose a contract broker and request the customs declaration.

In practice, the following supply schemes are used when working with a contract broker:

• An agency agreement, where the broker is a foreign trade participant and purchases the agreed goods for a fee;
• A commission agreement, as a variation of the agency agreement, where the import is conducted through a commission contract and the buyer is the consignor;
• Contractual structuring, where a foreign trade contract is concluded between the supplier and the importer, and a sale and purchase agreement is concluded between the importer and the buyer.

Using a contract broker offers the following advantages:

• The buyer does not need to be a foreign trade participant; the broker assumes all obligations;
• The importer is responsible for logistics;
• The broker performs all settlements, so the buyer does not need to engage in foreign currency transactions, thus avoiding violations of currency laws;
• The broker handles customs clearance, obtains permits, and ensures compliance with non-tariff regulations.

When deciding to import goods through a contract broker, a customer must conduct a thorough legal review of the contracts and consider potential commercial, customs, tax, and currency risks to avoid dishonest actions by the importer and potential losses.

The main risks of supplying goods from foreign suppliers under a broker contract include:

• The risk of losses or damage to goods in the event of poor performance of the broker contract;
• The risk of seizure or confiscation of goods if the broker violates customs laws, and the buyer's inability to intervene in resolving the conflict.

The risk of adverse consequences can be mitigated through detailed individual preparation and by reflecting all necessary terms in the brokerage services agreement.

Gray and Illegal Import Supply Schemes

The desire to maximize profit with minimal investment leads some entrepreneurs to use gray and illegal supply schemes to satisfy consumer demand. Furthermore, the political situation and mutual restrictions have allowed parallel imports to develop. However, while parallel import is permitted under current economic restrictions, gray and illegal schemes can result in adverse consequences, including liability for entrepreneurs.

In a gray import scheme, goods are imported without the right holder's permission, bypassing customs or using forged documents. Under a gray scheme, goods might be imported as spare parts or equipment components. Gray schemes may also involve the import of counterfeit products rather than original goods. The difference between parallel imports and gray schemes includes not only the lack of warranties but also the inability to use service centers.

Illegal schemes include all methods of moving goods in violation of current legislation, where goods are declared using forged documents, false information is provided, or a portion of the goods is not declared at all.[11]

Gray and illegal import schemes lead to violations of customs laws, for which liability arises under Chapter 16 of the Code of Administrative Offenses of the Russian Federation (the "CAO RF"), and criminal liability may apply in cases involving the smuggling of certain goods.

Despite the variety of supply schemes, an individual interaction scheme can be developed for specific interactions with foreign partners in the current climate. The key elements of such a scheme are satisfying the needs of both the supplier and the buyer while complying with current legal norms.

Minimizing the risk of adverse consequences is achieved through the detailed development of all terms in both intermediary agreements and foreign trade contracts, rather than using template contracts. This approach allows for the consideration of all nuances of importing goods from a specific country and supplier while complying with both national and international law.

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References

[1] Article 506 of the Civil Code.

[2] Clause 1 of Article 1005 of the Civil Code.

[3] Clause 1 of Article 430 of the Civil Code (Note: This likely refers to the EAEU Customs Code in context, though the source mentions the Civil Code).

[4] Resolution of the Arbitration Court of the Moscow District dated December 15, 2023, No. F05-30337/2023 in Case No. A40-17691/2023. The plaintiff sought to invalidate a decision to suspend its AEO certificate. Due to the plaintiff's failure to provide security in the legally required amount, the customs authority's decision was deemed lawful. The court denied the claim because the bank guarantee amount did not meet the required AEO security level as of the submission date.

[5] Clause 1 of Article 437 of the EAEU Customs Code.

[6] Decision of the Board of the Eurasian Economic Commission No. 37 dated March 10, 2022, On the Form of the Certificate of Inclusion in the Register of Authorized Economic Operators and the Procedure for Filling It Out.

[7] Resolution of the Fifteenth Arbitration Appeal Court dated February 18, 2019, No. 15AP-20519/2018 in Case No. A32-17414/2018. The plaintiff sought to cancel an administrative penalty under Article 16.17 of the CAO RF. The Novorossiysk Customs concluded that the company failed to comply with restrictions (technical regulation measures). The company did not take sufficient measures to ensure accurate declaration. As there were no insurmountable obstacles to compliance, the court denied the claim.

[8] Decision of the Board of the Eurasian Economic Commission No. 127 dated October 20, 2020, On the Requirements for Seals Affixed by an Authorized Economic Operator to the Cargo Compartments of Vehicles or Parts Thereof for Their Recognition by Customs Authorities as Means of Identification.

[9] Decision of the Customs Union Commission No. 323 dated June 18, 2010, On the List of Goods in Respect of Which Special Simplifications Provided to an Authorized Economic Operator Cannot Be Applied.

[10] Article 199 of the Criminal Code of the Russian Federation.

[11] Decision of the Arbitration Court of the Moscow Region dated August 5, 2021, in Case No. A41-40929/2021. The plaintiff sought to cancel a penalty under Part 1 of Article 16.2 of the CAO RF for failure to declare goods. Failure to declare goods or vehicles subject to declaration entails liability. The fact of the violation and the company's guilt were confirmed by case materials and not contested. The court denied the claim.