The Government has proposed introducing new quotas for the procurement of products manufactured in Russia

Pepeliaev Group advises of potential amendments to the legislation on procurement.

In the conditions of the crisis, the state authorities are developing protectionist measures to amend statutory regulation in the area of state and municipal procurement and of procurement by specific types of legal entities, with a view to targeting the customers’ activity in carrying out the procurement of mostly domestic products on a permanent basis.

The Russian Government has submitted to the State Duma two draft laws:

• draft federal law No. 969960-7 "On amending the Federal Law 'On the contractual system for the procurement of goods, work and services to meet federal and municipal needs'" (“Draft Law to 44-FZ”);
• draft federal law No. 970027-7 "On amending article 3 of the Federal Law 'On the procurement of goods, work and services by specific types of legal entities’” (“Draft Law to 223-FZ”)

We advise of the key new developments and implications for the market in the event the draft laws are adopted.

1. The changes in the powers of the Russian Government: with respect to establishing quotas for procurement

With a view to ensuring national security, the Russian Government determines in the overall annual procurement volume a minimum share of the procurement of goods manufactured in the Eurasian Economic Union (the “EAEU”) to be carried out by state and municipal purchasers of goods (work, services) as well as by legal entities. The list of goods (work, services) to which the provision regarding the assignment of quotas will apply will also be approved by the Russian Government.

Draft statutory provisions on the procedure for assigning quotas for the procurement of Russian goods are being developed. The resolutions being drafted take into account the capabilities of Russian industry and the specifics of each sector. According to the representatives of the Russian Ministry of Economic Development, sector-specific quotas should not entail an overstatement of prices and supplies of inferior goods^[1].

According to the relevant representatives, it is further proposed to set a mandatory share for the procurement of high-technology goods, including radio-electronic products, software as well as engineering and healthcare products, since stimulating the specified sectors increases the technological stability of the entire economy.^[2]

The provisions of the Draft Laws are aimed at supporting the Russian producers of goods, including as part of the diversification of military and industrial enterprises, in terms of stimulating the manufacturing of high-technology civil products.

The amendments to Laws No. 44-FZ and No. 223-FZ in a similar way provide for the powers of the Russian Government to determine:

• the requirements for the contents and form of the report on the customer’s compliance with the minimum share of procurement and the procedure for drawing up and placing the report in the unified informational system (the “UIS”);
• the requirements for the contents of the substantiation that the customer is unable to comply with the minimum share of procurement and the procedure for drawing up and placing the substantiation in the UIS;
• a competent federal executive body carrying out an assessment of the customer’s compliance with the minimum share of procurement.

In addition, the Draft Law to Law No. 44-FZ includes in the list of the Russian Government’s powers the ability to determine:

• the procedure for using the UIS with a view to assessing the compliance of state and municipal customers with the minimum share of procurement;
• the cases and the consequences of, as well as the procedure for, an assessment being carried out of the customer’s compliance with the minimum share of procurement, and the indicators to assess whether the customer has achieved the minimum share of procurement.

2. The procedure for and the specifics of carrying out procurement with a view to the customer achieving the minimum share of procurement

The Draft Law to Law No. 44-FZ established the procedure for the state and municipal customers to comply with the minimum share of procurement and the specifics of determining the initial (maximum) contract price, the price of a contract concluded with a single supplier (contractor, service provider), the initial price of an item of goods, work or a service based on the specified characteristics of the goods produced in a EAEU member state.

The same Draft Law introduces an article regarding the specifics of carrying out procurement for the customer to achieve the minimum share of procurement. With a view to performing the obligation to carry out the procurement of goods taking into account the relevant requirements of the Russian Government, the customer:

• sets a limit with regard to goods (work, services) and foreign states (except for the EAEU member states) in a notice of procurement, in the procurement documentation and in an invitation to take part in determining a supplier (a contractor, service provider) under a closed procedure;
• sets out in a contract the supplier’s obligation to supply goods (work, services) produced in an EAEU member state, provided that procurement is carried out from a single supplier (a contractor, service provider) in accordance with the cases set out in article 93(1) of Law No. 44-FZ.

if no procurement application with goods (work, services) from EAEU member states is submitted, the customer will have to recognise that the procurement has failed and, if needed, amend the project schedule and either select the supplier once again, or carry out another procurement procedure.

A procurement of foreign goods and services will only be allowed if, following the extension of the deadline for filing procurement applications, once more no applications with Russian goods and services are submitted.

At the end of the year the customer should prepare a report on the volume of goods procured and place such report in the UIS before 1 April of the year following the reporting year. If, at the end of the year, the volume of goods (work, services) procured from EAEU member states is not in line with the minimum share of procurement, the customer must place in the UIS a substantiation that the customer is unable to achieve the minimum share of procurement.

Therefore, the customer will have to annually comply with the minimum share of procurement established for it. If the customer fails to comply with this requirement, it will have to report the reasons for this^[3].

The proposed amendments will extend the procurement procedure and complicate the procurement of goods manufactured abroad. Both Russian and foreign market participants should take this into account when planning their activity in Russia.

What to think about and what to do

We recommend that companies should:

• Follow up on the measures being taken by the government and the changing regulations to remain good faith participants of the market;
• In order to avoid violations of antitrust legislation, take account of the potential changes in the regulation when participating in procurement procedures, including when making purchases from a single supplier;
• Assess the commercial decisions of the company relating to the customer achieving the minimum procurement volume in terms of their being economically justified and compliant with antimonopoly legislation;
• Pay special attention to how they build commercial relationships with Russian and foreign suppliers when carrying out procurement;
• Consider taking other measures aimed at reducing risks of antimonopoly violations.

Help from your adviser

Pepeliaev Group’s lawyers have significant experience of providing legal support to clients in the sphere of antitrust regulation, including organising and conducting state and municipal procurement for Russian and foreign companies as well as procurement by specific types of legal entities.

Our lawyers will be happy to provide any legal support you need:

• when analysing the potential risks inherent in the company’s participation in the procurement procedures;
• in developing strategies for companies to participate efficiently in procurement with an audit of the measures being taken for compliance with Laws No. 44-FZ and 223-FZ;
• when assessing the compliance of commercial decisions that are taken in connection with participation in procurement, as well as auditing the relevant documents to prevent antitrust offences;
• in representing clients before the Russian Federal Antimonopoly Service and courts in cases involving public procurement results being contested, persons being removed from the register of bad-faith suppliers, and other offences;
• in developing other measures aimed at mitigating the risks of antitrust offences.