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New restrictions for foreigners in the field of public procurement

08/2014

Under Decree No. 656 signed by Prime Minister Dmitry Medvedev on 14 July 2014, Russian state and municipal purchasers may no longer buy certain types of foreign-made vehicles, as well as transportation and heavy equipment for public use. This prohibition – the first in a series of similar bans aimed at limiting foreign businesses in the field of public procurement – came into force for the most part on 16 July 2014.

The restrictions affecting foreign manufacturers are introduced by the above Decree to protect Russia's domestic market, develop the national economy and support Russian manufacturers. The Russian Prime Minister subsequently pointed out that the ban is one of a set of new measures for the support of the Russian industry within the framework of the WTO and should ensure the necessary balance between domestic and foreign goods in the market.

The Decree provides a detailed list of a wide range of foreign-made goods, which are subject to a ban on participation in public procurement. The list can be divided into two groups of goods, namely, heavy equipment and vehicles.

As a general rule, the ban applies to the types of heavy equipment and vehicles listed in the Decree if their country of origin is not Russia, Belarus or Kazakhstan (the founding member states of the Eurasian Customs Union). The Decree however exempts certain categories of equipment and vehicles from the ban (for example, cars released from assembly sites of foreign manufacturers labelled under Russian law as "industrial", which are located in either of the above three countries).

The criteria for determining the country of origin of goods under Customs Union laws and regulations are quite unclear, which gives public officials and quasi-public officials involved in the process a certain amount of discretion.

The effect of the Decree is double-edged on the "Russian" side. On the one hand, Russian manufacturers are given a competitive advantage over foreign manufacturers. On the other hand, the prohibition on the public sector from purchasing foreign equipment for public use is likely to result in the public sector using equipment of significantly lower quality than that which is foreign-made.

Foreign manufacturers can still gain access to the relevant public procurement markets in Russia, but this will require them to open local production or industrial assembly facilities, or to make alliances with local manufacturers. This presupposes a strong commitment and a solid long-term vision.

Authors

Safaryan Hayk
Hayk Safaryan
Partner
Moscow