I. Basic Principles of the Procurement System
Federal Law No. 94 on Placing Orders for Provision of Goods, Works, and Services for State and Municipal Needs of July 21, 2005, is the main document that regulates government contracts and procurement system in the Russian Federation. This law, which has been amended 18 times since it entered into force on January 1, 2006, created a unified nationwide procurement system. The law also established mandatory procedures applicable to all federal, provincial, and municipal institutions that are authorized to conclude government contracts, if the contracts are paid for by federal, provincial ore local appropriations. As stated in the Law, government contracts are concluded to meet the needs of the Russian Federation and its constituent components in the areas of national defense, security, other vital government tasks, and for implementing international, federal, and provincial programs. The needs of a government institution for products and services required for its functioning are considered federal needs and are covered through government contracts.
The Russian procurement system consists of such elements as defining state needs, the creation of orders and their placement, conclusion of government contracts, and fulfillment of contractual obligations. Restrictions established by this law do not apply when the contract’s amount is below the limit established for cash transactions between the legal entities established by the Central Bank of Russia.
This Law regulates issues related to the offering and awarding of contracts. The drafting and execution of contracts follow the principles of the Civil and Budget Codes of the Russian Federation. Government procurement policies and practice must conform to provisions of the Federal Law on Competition and Restriction of Monopolistic Activities. A special department at the Federal Antitrust Agency has been established to monitor the compliance of government procurement with the law.
Violation of the prescribed procedure for placement of contracts is an administrative misdemeanor and is punishable by a fine in the amount of 200 minimum monthly labor wages (approximately US$30,000). A contractor is allowed to charge interest for the unpaid amount of money if payment is delayed by a government customer.
II. Contracting Procedures
The ways of announcing and offering government contracts are specified by law. They include:
- Calls for bids
- Auctions, including electronic;
- Requests for proposals;
- Offering a contract to a single contractor; and,
- Placing orders on mercantile exchanges if the contract price exceeds the amount of RUB 5 million (approximately US$170,000).
In order to achieve budgetary savings, orders placed on similar goods or services by the same government customer are to be conducted simultaneously. Calls for bids and auctions must be open most of the time. Closed auctions are allowed when the contract requires the supply of goods or the performance of works or services, information on which is classified as secret.
The difference between a call for bids and an auction is that when a call for bids is announced, a contract will be awarded to the contractor who offers the best conditions for performing the contract. At auctions, a contract is awarded to an anonymous contractor who offers the lowest price for the contract. Since January 1, 2010, the qualification of a contractor is considered to be an important factor in the awarding a contract, in addition to the requirement that the contract be awarded to the lowest priced bidder. Special requirements were established for contractor’s qualifications in construction work. In order to participate in an auction, a contractor must have at least five years experience in performing similar works and prove that in his previous projects he did at least 30% of the contracted work on a specific jobsite.
Requests for proposals are announced on the website of the agency which intends to offer a contract, and the winner is the contractor who proposed the lowest price. This type of announcement has restrictions due to the length of contract and its amount (not to exceed US$10,000 per quarter) and is usually used to provide services to government organizations located in foreign countries.
A contract can be offered to a single contractor in cases when:
- The contract relates to the activities of natural monopolies;
- The government acquires cultural valuables;
- The contractor has exclusive rights to offer the requested goods, works, or services; and,
- The contract requires the performance of works related to military mobilization activities.
In some cases, a government contract can be awarded without competition. Circumventing the prescribed rules is allowed when time-consuming procedures would be counterproductive in force majeure circumstances and in need of urgent medical intervention.
In November 2009, the Russian Federation approved a list of goods, services, and works, which since January 1, 2010, must be acquired by federal customers through open online auctions only. Presently, this list includes construction contracts, contracts related to the supply of medicines, food, and office equipment. As of July 1, 2010, all traditional auctions will be prohibited and all auctions will be conducted exclusively online. For provincial and municipal customers, this requirement will enter into force as of January 1, 2011. It is expected that up to 70% of all government contracts will be distributed through online auctions. The remaining 30% of contracts (primarily those for research work, engineering, architectural drafting, and medical services) will be awarded through calls for bids.
III. Access to Government Procurement Information
Originally, the Law required that announcements of government contracts be published on the website of the customer organization and in the official publication, which is a special newspaper designated by the federal Ministry of Economic Development. Announcements are to be published no later than 30 days before the sealed envelopes with the proposals/bids were to be opened. The government was supposed to synchronize the newspaper and online publication of the announcement concerning the contract. The requirement to publish information about government contracts in federal mass media has been cancelled since January 1, 2008, and since January 1, 2010, the only official source of information available on all government contracts is the federal online portal administered by the Russian Federation Ministry for Economic Development. This portal publishes information on all contracts offered by federal, provincial, and municipal authorities. The publication of government procurement information in mass media in constituent components of the Russian Federation will cease as of January 1, 2011. It is expected that this will simplify legal control over ensuring that all contract awards are in compliance with legal requirements, increase transparency and eliminate possible further correction of contract information, and enhance opportunities for contractors who will no longer be required to review multiple sources of information.
Information on this government website is to be published in the Russian language, to be free from advertisement, and accessible by anyone at any time, free of charge and free of any restrictions. The only contracts exempted from this publication are those which include information classified as state secrets. It is required that no special equipment, computer programs or skills be needed to access this information. For security reasons, the use of electronic signatures, electronic registration of operations, and daily preservation of backup information is required.
IV. Specifics of Government Procurement
A. Price of a Contract
It is estimated that about ½ of the 2009 national budget was spent on contracts concluded on behalf of the Russian Federation government.
Under Russian law, all prices for government contracts are fixed and defined in the contract at its conclusion. The correction of the contract price is allowed if:
- Natural monopolies need to be compensated for inflation;
- The government agency insists on changing the contract in order to increase the volume of works and services provided; and,
- The execution of a long-term contract for the amount exceeding RUB 10 billion (US$300 million) is impossible without price change due to substantial increase in contract costs.
Advance payments cannot exceed 30% of the contract price, and the contractor must prove that he has secured funds to fulfill his contract obligations in the amount equal to 1/3 of the contract price. There is no requirement for a contractor to purchase breach of contract insurance.
According to the ruling of the Highest Commercial Court of the Russian Federation No. 24 of June 22, 2006, the government procurement procedures are applicable in all cases where the contract price exceeds RUB 60,000 (approximately US$2,000). However, if the institution offering the contract is not an institution specifically authorized to award government contract and the services provided by a contract are aimed at securing normal functioning of this institution, and the amount of a contract is under RUB 200,000 (approximately US$7,000), it is not required to follow all the prescribed procurement procedures, and a regular contract based on provisions of the Civil Code and Budget Code can be concluded.
Amendments to the Law, which would allow increasing the amount of the contract price when offering contracts without conducting auctions or following the prescribed formalities, are presently under consideration of Russian legislators.
B. Length and Execution of a Contract
The Budget Code of the Russian Federation provides for a three-year budget cycle. This allows agencies to enter into government contracts lasting for a three-year period. Contracts for implementing long-term federal government target programs can be concluded for the duration of these programs and are not limited to three years.
A contractor that has submitted a request for participation in an auction cannot refuse to accept the contract if the contract is subsequently awarded to him. If a contractor cannot perform the contracted work in full, part of the contract can be awarded to the contractor who was evaluated as being next in line.
C. Privileged Contractors
Organizations representing or employing handicapped persons and correctional institutions receive special priority in placing orders. These organizations may request an increase of up to 15% in the contract price.
The Law provides that no less than 15% of all government contracts must be awarded to small business enterprises. This does not apply to contracts in the military and national security fields. As a rule, the requirement for small business participation is met through the organization of special auctions or calls for bids established exclusively for small businesses. According to the opinion of Russian experts, this measure excludes small businesses from competition for large projects outside of those which were preliminary selected by the government for distribution to small business. It is not clear how this provision will be implemented through the participation of anonymous contractors in online auctions.
D. “Buy Domestic” Requirement
The Law does not provide restrictions with regard to the contractor’s citizenship. While the law establishes a national regime for government procurement, foreign contractors and suppliers participate in bids and auctions and have the same rights as Russian legal entities. The government, however, may establish prohibitions or restrictions for acquisitions of goods, works, and services originated outside of Russia in case of military contracts or when issues of national security are at stake. There is no comprehensive information on the percentage of government contracts awarded to foreign companies. However, the share of foreign companies contracting for the Russian government can be assessed by comparison. In 2006, for example, Russia concluded approximately 60 contracts to supply medical equipment for state needs. The entire amount of the contracts was RUB 608.2 million (approximately, US$25 million.). Approximately 60% of this money was spent on imported supplies.
In order to use the government procurement system for protectionist purposes, in December 2008, the Ministry of Economic Development of the Russian Federation issued a regulation which allowed for preferences for Russian enterprises in the amount of up to 15% of the contract price in selected economic areas. The areas selected are agriculture, metal industry, machine building, and some others. This regulation was issued in a package with other measures aimed at fighting the economic crisis. This measure has proven to be ineffective because no qualifying requirements for contractors were established. All interested foreign contractors were able to create Russia-based legal entities which met the necessary requirements for participation in bids.
From time to time, the Russian government considers different protectionist measures aimed at ensuring that the priority in government contracts is given to domestic suppliers of goods and services. For example, in the middle of 1990s there was an unsuccessful attempt to require that Russian high-level officials use domestically produced cars for their official transportation needs. This attempt failed because of the unreliability of Russian cars and bureaucrats’ unwillingness to lose the comfort of better foreign car models. Presently, there is no requirement for the Russian officials to only use Russian airlines when they fly outside of the country for official business. In November 2009, Russian national air carrier Aeroflot proposed that the government introduce this requirement legislatively. Major transportation agencies tentatively agreed with this idea, and there is a high probability that a relevant legislative proposal will be submitted to the legislature in 2010.
Prepared by Peter Roudik
Chief, Eastern Law Division
 Id. art.3.
 Presently, this amount is equal to RUB 60,000 (approximately, US$2,000) (Directive of the Central Bank of Russia No. 1050-U, Nov. 14, 2001).
 Vedomosti Verkhovnogo Soveta I S’ezda Narodnykh Deputatov RSFSR [Bulletin of the RSFSR Supreme Soviet and Congress of People’s Deputies, then the official gazette] 1991, No. 16, Item 499.
 Federal Law No. 94 on Placing Orders for Provision of Goods, Works, and Services for State and Municipal Needs of July 21, 2005, art. 20(1).
 Id. art. 32(1).
 RG Nov. 23, 2009.
 Federal Law No. 218-FZ of Jul. 24, 2007.
 Irina Smotritskaia, Goszakupki v Sisteme Mer Antikrizisnogo Regulirovaniia Ekonomiki [Government Procurement as an Anti-crisis Measure, in Russian], Vserossiiskii Ekonomicheskii Zhurnal, 2009, No. 7, at 148.
 RG, 2006, Aug. 22.
 Julia Vasilieva, Zakazchikam Uprostiait Zhizn [Life Will be Easier for Customers, in Russian], RG, Nov. 10, 2009.
 See also, Federal Law No. 88 of June 14, 1995 on State Support of Small Entrepreneurship, Sobranie Zakonodatelstva Rossiiskoi Federatsii (official gazette) 1995, No. 25, Item 2343.
 Liubov Andreeva, Organizatsionno-Pravovye Voprosy Sovershenstvovaniia Sistemy Goszakupok [Legal and Organizational Issues Related to Improvement of the Government Procurement System, in Russian], Zakon, 2006, No. 3, at 102.
 Irina Smotritskaia, Goszakupki v Sisteme Mer Antikrizisnogo Regulirovaniia Ekonomiki [Government Procurement as an Anti-crisis Measure, in Russian], Vserossiiskii Ekonomicheskii Zhurnal, 2009, No. 7, at 144.
 RG Dec. 3, 2008.
 Elena Vladimirova, supra note 10.
Last Updated: 09/16/2014