Building law and regulation in Russia during Covid-19

Updated on 20.07.2020.

1. Is there construction-relevant COVID-19 regulation?

To date, there is no regulation specifically implemented within COVID-19 outbreak to support companies involved in construction activities.

However, on 16 April 2020 the Russian President announced certain measures to support the construction industry, namely:

  • to provide reduced (6.5%) interest rates for personal mortgage loans partially subsidised by state to support residential construction;
  • to ensure that bank loans to construction companies are available;
  • to speed up construction and repair of public roads; and
  • to continue implementation of large infrastructure projects in railways, highways, airports and sea ports construction.    

On 23 April 2020, the Russian Government adopted the respective regulations on the above subsidised reduced interest rates for personal mortgage loans. This programme is in effect until 1 November 2020.

In addition, RUB 12 bln were allocated from the federal budget to compensate losses of banks issuing preferential loans to residential construction companies.

The Government has also allocated RUB 43 bln for construction and repair of public roads and bridges in 46 regions of Russia.

Whereas many other sectors were temporary closed until 12 May 2020 and people were strongly encouraged to work from home, it was acknowledged in most of the regions of Russia that construction companies relate to so-called “continuously acting” entities, and thus, the above restriction shall not apply to them. The only exception was Moscow and Moscow region where construction works (same as many other business activities) were generally suspended until 12 and 18 May 2020 respectively, save for construction of medical and public transport facilities. Thus, construction companies have resumed their work after these dates.

To ensure uninterrupted construction process, the Government has prolonged the validity term of all construction permits expiring by 1 January 2021, for one year.

New federal law adopted 8 June 2020 provides for simplified renewal of expiring land plot leases, which may relate to construction sites as well.

Construction companies may also currently rely on the following general regulation to the extent applicable in their particular case:

  1. in Moscow and Moscow region and some other regions of Russia, COVID-19 outbreak has been officially declared as a force majeure event (see below);
  2. temporary abandonment of administrative fines for violation of currency control regulations relating to certain import and export operations affected by COVID-19 outbreak;
  3. deferral of rent payments under federal property lease agreements for small and medium businesses; and
  4. temporary suspension (by 1 January 2021) of charging penalties and losses under agreements for acquisition of residential premises in “construction in progress” objects.

2. Subsidies and other government support for employer, contractor and other involved parties? (generic, high level only).

Construction is not mentioned among the most-affected industries as currently listed by the Russian authorities.

On the other hand, the Russian Government adopted the list of core companies (more than 1,300) and also included major construction companies therein. The Government will be closely monitoring their businesses and, if needed, take actions to support their stability, including financial standing. Currently, it is only provided that such core companies may apply for bank loans under reduced (5%) interest rates and also may not go bankrupt.

On 10 May 2020, the Government adopted a decree providing for the following additional measures to support core companies:

  • granting non-repayable subsidies to finance their expenses;
  • tax payment deferral or payment in installments; and
  • state guarantees under loans.

According to the decree, to be eligible to the above support measures, the core company has to meet the following criteria:

  1. it may not be a foreign company, or a company controlled by a foreign company or individual by more than 50%;
  2. it may not have outstanding payments to the state budget, including taxes, subsidies and state duties exceeding RUB 10,000 (approx. EUR 125); and
  3. a special committee should determine that this core company relates to a “risk group”.   

It is officially reported that the total amount of subsidised loans granted to core companies exceeds RUB 132 bln to date. However, many companies admit that it is burdensome to apply to the above additional measures.

As mentioned above, certain government support measures for construction industry have been announced by the Russian President and implemented by the Russian Government. If the situation will be worsening (for example, in residential construction), then additional support may be envisaged.

Under Russian civil law, a legal entity is relieved from liability for failure to fulfil an obligation if such failure is caused by extraordinary and inevitable circumstances (i.e. force majeure circumstances).

The spread of COVID-19 and the restrictive measures authorities take to combat the pandemic may be considered as force majeure events. As mentioned above, in some regions of Russia (including Moscow and Moscow region), COVID-19 outbreak has been officially declared as a force majeure event.
In the event of a dispute, the COVID-19 situation and the imposition of restrictive measures by the relevant authorities are universal grounds for the non-fulfilment of contractual obligations and for exemption from liability. The issue of the application of force majeure conditions will be decided on a case-by-case basis by a court or an arbitration tribunal, depending on the circumstances of the particular case and the terms of the contract concluded between the parties.

To this end, a number of elements will be taken into account:

  • the nature of the unfulfilled obligation;
  • the time period for its fulfilment;
  • how the spread of COVID-19 and the introduction of related measures prevented from the fulfilment of the obligation; and
  • whether the defaulted party to the contract could have taken measures to fulfil the obligation despite the COVID-19 outbreak.     

Many agreements also provide for a specific procedure applicable to the parties in the event of force majeure, and failure to comply with it will deprive the party of the right to invoke such circumstances.

As at the time of writing, the Chamber of Commerce and Industry of the Russian Federation (for contracts with foreign entities) and relevant regional chambers of commerce and industry (for local contracts) recognise the spread of COVID-19 as force majeure and issue the relevant certificates if non-fulfilment was caused by restrictions introduced in connection with the COVID-19 outbreak. It is expressly provided that such certificates are issued free of charge. However, according to the Chamber of Commerce and Industry of the Russian Federation, around 95% of applications for force majeure certificates under local contracts referred to COVID-19 outbreak are currently rejected due to inconsistency with general conditions of force majeure.

The clarifications issued by the Russian Supreme Court qualify COVID-19 outbreak as force majeure and confirm the above general rules and elements of application of force majeure provisions in case of COVID-19 outbreak.

4. Does the Epidemic give rise to termination rights to either party?

To date, according to Russian law, COVID-19 outbreak is generally not sufficient to terminate an agreement unless otherwise is expressly agreed by the parties thereto (for example, for cases of force majeure).

Potentially, an affected party may also refer to art. 451 of the Russian Civil Code, which generally allows amending or terminating an agreement in the event of extraordinary change of circumstances. However, following the existing case law, Russian courts are reluctant to apply this regulation, for example, in cases of financial crises, inflation or foreign currency rate fluctuations.

Another option is termination due to impossibility to perform (art. 416 and 417 of the Russian Civil Code) but the relevant court practice is also inconsistent.

The above-mentioned clarifications of the Russian Supreme Court expressly provide that, depending on particular circumstances, a party may potentially refer to art. 416, 417 or 451 of the Russian Civil Code if affected by COVID-19 outbreak. Therefore, we may expect that the court practice will be aligned in this respect.

5. Do the measures currently being taken in relation to the Epidemic amount to change in law? What are the price and time consequences?

Unless it is expressly provided in the respective law, it may not apply to agreements entered before such law has been adopted.

In general, there is no concept of “change in law” in the Russian civil law. Parties usually treat such changes as force majeure events under relevant agreements (see above).

Art. 417 of the Russian Civil Code generally provides for termination of obligations in case of adoption of regulatory acts which make it impossible to perform such obligations. But this is rather a “sleeping” norm.

Recently adopted regulations on COVID-19 epidemic are generally not providing for any changes to existing agreements. However, there are several exceptions relating to lease relations (see above).

6. Are there any other issues relevant to COVID-19 the construction industry should be aware of?

It should be noted that almost all court and administrative procedures in Russia were suspended until 12 May 2020. Currently courts and also public notaries and supervision authorities (e.g., construction supervision bodies and municipal authorities which are usually involved in construction process) are working on irregular basis but they are generally resuming their work.

From the contractual standpoint, it may be advisable for parties to negotiate including clauses on force majeure in future or existing agreements to deal with COVID-19 or any similar situation.

7.  What long-term measures are discussed or adopted to support the construction industry?

By 1 June 2020, the Government developed the nation-wide plan of actions to ensure resuming employment and household income, economic growth and long-term structural changes in the economy, including construction industry. It is provided that economic recovery will have three stages to be fully implemented by the end of 2021:

  1. “adaptation stage”. The main goal at this stage should be prevention of recession widening;
  2. “recovery stage”. Economic growth and household income increase should be ensured at this stage; and
  3. “brisk growth”. At this stage, the annual GDP growth should be at least 2.5%. 

Implementation of this plan has started in July 2020 and it will require around RUB 5 trillion in 2020-2021. In the construction industry, it is planned to simplify and “digitalise” related regulation. In particular, the Government will review the existing construction norms and regulations as well as relevant administrative procedures in order to speed up and cheapen construction, especially in emergency cases.

Further adoption of applicable regulation, including support measures, both on federal and regional levels, will largely depend on how the current situation will be developing.

Artashes Oganov