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Legal Alerts / 11 Apr 2022

Effective Exclusion of Russian Entities from Public Procurement

Russia’s unjustified war against Ukraine has sparked not only a plethora of economic and financial sanctions against Russia and Russian entities but also a tsunami of socially responsible companies taking part in voluntary sanctions, i.e., withdrawing from Russia, or otherwise drastically limiting their operations therein.

Whereas public procurement is generally characterised by the principle of non-discrimination and the search for the optimum value for the taxpayers’ money, it does not exist in a vacuum. Russia’s war against Ukraine and the ensuing newly minted fifth round of sanctions imposed on 8 April 2022 brings a momentous change in the position of Russian, or Russia-connected, tenderers in public procurement processes. Namely, Russian entities are now facing a general ban on participating in public procurement processes in the EU, the implications of which are discussed in detail below.

Given that sanctions are based on EU-level regulations, they are directly applicable in the Member States. Moreover, the motivation for socially responsible contracting authorities to undertake voluntary actions regarding public tenders involving goods of Russian origin has increased, and therefore we discuss how this may be legitimately achieved within the framework of the Finnish public procurement legislation.

The latest developments of sanctions

On 8 April 2022, the Council of the EU imposed new sanctions on Russia stipulating that from 9 April 2022 onwards it is prohibited to award or continue the execution of any public contracts (within the scope of public procurement directives) with Russian entities.

However, for contracts concluded before 9 April 2022, the prohibition to execute public contracts does not apply until 10 October 2022. The prohibition covers Russia-established natural and legal persons, legal persons owned for more than 50% by Russian persons or entities, as well as persons acting on behalf of such entities. Moreover, the prohibition’s subjective scope covers also public procurement processes where Russia-connected persons or entities account for more than 10% of the contract value, subcontractors, suppliers or entities whose capacities are being relied on in the procurement process.

Importantly, the prohibition is not without exceptions, and as such, competent authorities may grant exceptions under certain circumstances. In addition to the general ban of Russia-connected entities from public procurement, contracting authorities also have to duly take into account sanctions imposed on persons and entities. Sanctions are directed at certain natural or legal persons via the prohibition of making economic resources available thereto, either directly or indirectly. This entails that not only is it prohibited to make economic resources available to sanctioned persons, but also to companies owned or controlled by such persons.

Furthermore, indirectness entails a wide range of factual circumstances ranging from having a right to use a non-sanctioned legal person’s assets or sharing jointly their financial liabilities. This in turn entails that contracting authorities must pay special attention to companies with whom they engage in procurement contracts and effectively verify the accuracy of the information and proof provided by the tenderers in unclear cases.

Discretionary exclusion via public procurement

While contracting authorities are obliged to comply with sanctions, they have already had certain discretionary means at their disposal for the exclusion of Russian entities from public procurement process. In particular, the Finnish Act on Public Contracts in Special Sectors contains a provision on the treatment of certain tenders that include goods originating from third countries.

Under Section 97 of the Act, tenders with a value comprising 50% or more of goods originating from third countries may, on a voluntary basis, be rejected by contracting authorities. Previously considered almost a dead-letter of the law, Section 97 showcases a rare and oft-forgotten exception to the public procurement legislation’s ubiquitous non-discrimination principle, which provides contracting authorities with politically motivated discretionary means for the exclusion of certain tenders.

How to determine the origin of goods?

With respect to goods originating from third countries, Section 97 refers to the Union Customs Code, which categorises goods based on their origin into goods having a preferential origin and goods having a non-preferential origin.

The guiding principle in determining the origin of the goods is either determining where the goods were manufactured or produced, or alternatively where the goods underwent their last, substantial, economically justified processing or working, in an undertaking equipped for that purpose, that resulted in the manufacture of a new product or represented an important stage of manufacture.

The importance of international agreements

Importantly, Section 97 is inapplicable to tenders originating from third countries with whom the EU has concluded a multilateral or bilateral agreement to ensure that undertakings originating from the EU have comparable and effective access to that third country’s markets. Given that EU does not have such agreements with Russia that cover public procurement, Russia is effectively considered a third country within the meaning of Section 97.

Conclusion

Overall, Russia’s war against Ukraine has not only brought about new legislative developments that contracting authorities need to carefully consider while carrying out public procurement, but it also has the potential of reinvigorating the voluntary application of Section 97 of the Act on Public Contracts in Special Sectors with respect to goods of Russian origin.

While Russia’s main export articles pertain to natural resources, other goods having a marginal role in international commerce, the new public procurement related sanctions and pre-existing voluntary tools serve an important principle: taking a clear stance against Russia’s unwarranted aggression against Ukraine.

We will continue to monitor the situation and provide timely updates on any further sanctions and legislative developments and how they could impact contracting authorities. Borenius lawyers are available to answer any questions you may have with regard to the situation in Ukraine.

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