Effective from 1 January 2017, purchases of goods, works and services of Russian origin by certain categories of purchasers will have priority over those of goods, works and services of foreign origin in accordance with Russian Government Decree No. 925 dated 16 September 2016 (see the Russian version of the “Decreehere). The Decree was adopted within the framework of the Government’s import substitution policy.

The new rules apply to suppliers who sell goods, works and services to state corporations, natural monopolies, as well as companies in which the Russian state holds at least a 50% stake, their majority-owned subsidiaries whose purchases are regulated by Federal Law No. 223-FZ dated 18 July 2011 (see the Russian version of the Law here). All types of procurements are affected as the Decree does not restrict its application to any specific goods, works or services.

The Decree places foreign goods, works and services suppliers at disadvantage in two key respects:

– At the selection stage, suppliers of Russian goods, works and services (“Local Suppliers”) will benefit from a 15% virtual discount from the prices specified in their offers.

– At the contract conclusion stage, if a tender winner is a Local Supplier, the contract will be concluded at the price set out in the offer, meaning without the 15% discount. On the contrary, if the tender winner is a supplier of foreign goods, works or services, the contract price is reduced by 15% from the supplier’s proposed price.

Goods are deemed to be of Russian origin, if they are made or have been sufficiently processed in the country in accordance with the customs regulations that are applicable in Russia. A supplier is considered Russian if it is a legal entity registered in Russia (which can be fully foreign-owned, except in the case of specifically regulated sectors, such as media) or a Russian citizen.The procurement priority rule does not apply, in particular, in the following cases:

– if a single bidder took part in a tender;

– if only foreign-made goods were offered; or

– if purchases are made from a supplier who enjoys the “sole supplier” status.

The main way for companies to obtain the status of a sole supplier or have their goods recognised as locally produced is, akin to the rules on the procurement of goods, works and services for state needs
(Federal Law No. 44-FZ dated 5 April 2013 – see the Russian version of this Law here), to enter into a special investment contract under which they undertake to establish or enlarge their production in Russia in exchange for state guarantees and tax incentives. To date, four such contracts have been signed, including a contract for enlarging a machinery plant that was signed at the Sochi International Investment Forum on 30 September 2016. Similar contracts were concluded this summer by major global producers of agricultural machinery and cars. Other major manufacturers of cars, electrical goods, and agricultural machinery (see the report here in Russian) have reportedly initiated negotiations to conclude such contracts.

The Decree states that the priority is subject to the provisions of the General Agreement on Tariffs and Trade 1994 and the Treaty on the Eurasian Economic Union of 2014. In this context, the question of whether the Decree complies with the international obligations undertaken by Russia under these agreements remains open. However, this is an issue for the WTO Dispute Settlement Body and the Court of the Eurasian Economic Union to decide, as they are the competent authorities to review disputes arising from the above agreements.

The introduction of the local goods, works and services procurement priority rule (together with devaluation of the Russian rouble) is a further stimulus, albeit negative, that will encourage foreign manufacturers to localise their production in Russia (please see here for our earlier Alert on the issue of localisation).