New Russian Procurement Regulations: Off-shore Suppliers Can No longer Participate in Government Procurement

To facilitate the growth of the local business community it is forbidden for corporations registered in the off-shore jurisdictions to bid for Russian government procurements.  The law went into effect August 13, 2015. Countries and territories designated as ‘off Shore Jurisdictions’ are named in the RF Tax Code (Amendment 1 Clause 3 Article 284).

Since the law came into effect operators of the electronic trading platforms are now required to cease off-shore corporations and once they have registered operations in Russia they will receive accreditation.  It is important to note that corporations registered in the off-shore jurisdictions can no longer participate in an electronic tender, even if the announcement about the government tender was placed and the relevant application documents were prepared before August 13, 2015. The commission in charge for government procurements is obliged to check if participants are compliant.

In case of non-electronic tenders, the question about the registration of the off-shore corporations which applied before 13 August remains to be considered.

The implication of the Federal Law No. 227-FZ 13.07.2015, “On Amending part of the Federal Law on Contract systems in the field of procurement of goods, works and services for governmental and municipal needs,” means that companies who want to participate in government procurement have to be legally domiciled in Russia or other locations, not referred to in Article 284 of the RF Tax code mentioned above.

Competitiveness of Russia: myth or reality

The Federal State Statistics Service released the results of the Russia's economic development in the 1st half of 2015 in comparison with the same period in 2014. It was recorded the decrease in the volume of paid services to the population (bln. RUB) by 1.5%; transport freight turnover (bln. ton-kilometers) by 2.3%; index of industrial production by 2.7%; real disposable incomes by 3.1%; investment in fixed assets by 5.4%; retail trade turnover (bln. RUB) by 8.0%; export of goods (bln. USD) by 29.1%; import by 38.7%.

Compared to the same period in 2014, an increase for the 1st half of 2015 is observed on the following parameters: the increase of a consumer price index by 16%; the price index of industrial products producer by 11.8%; total number of unemployed (mln. people) by 6.3%; officially registered unemployed (mln. people) by 5.2%. The increase of these indicators is a negative factor. Among the main macroeconomic indicators, the growth of only two is positive: the production of agricultural products (bln. RUB) (increased by 2.9%) and the volume of communication services (bln. RUB) (increased by 1.1%).

The decline of the Russian economy continues. However, the comparison of monthly indicators leads to the conclusion that the recession is slowing down. Following the experts of the RF Government’s economic block, the current situation in the economy begins to improve; that indicates the passage of the "lower" point. Within this framework, the statement of one of the largest consulting firms Boston Consulting Group (BCG) should be noted.

Having assessed the competitiveness of the 25 countries’ economies, which embraced almost 90% of world exports of manufactured goods, based on the index of production costs, BCG lifted Russia to the fourth position. The first three positions belong to Indonesia, India and Thailand. The assessment is based on four important criteria: wages level, operational efficiency, energy costs and the national currency exchange rate. The weakening of the ruble against the US dollar and the fall of the world energy prices influenced the index result.

It should be noted that this is a temporary phenomenon and one shouldn’t rely on long-term positive effect related to the devaluation. The devaluation reduces the GDP only in the first year, thereafter it stimulates GDP. But in the long run its impact is neutral or negative, as it will spin up another round of inflation. Further ruble weakening, demand reduction and other negative symptoms will take place. The experts expect the stabilization and increase of the world energy prices, and thus strengthening the national currency of Russia, which will reduce the competitiveness position of Russia. In this case the economy can be stimulated at the expense of credit support and improvement of the investment climate.

Following the Credinform experts, there is every reason to approve Russia as a competitive country. For the last 4 years (2011-2014) about 1 000 large industrial units and nearly as much smaller plants and units were opened in Russia. In spite of negative trends have slowed this process, more than 23 new production units with investments turnover from 500 mln. RUB were opened in Russia during the 1Q 2015. Only processing enterprises were considered at the calculating, and organization of energy, mining and agriculture were not.

TOP-5 of the largest executed projects for the 1Q 2015:

  • The first full-cycle plant for solar modules production (Novocheboksarsk, Chuvash Republic), “Hevel” – joint enterprise of “Renova” group of companies and “Rosnano”. Investment volume accounted to 20 bln. RUB. 300 jobs were created.
  • First of ten plants of the Russian-Chinese industrial park (Asinovskiy district, Tomsk region). The general investor is Chinese corporation AVIC-Forestry. ZAO “Roskitinvest” and “Henda-Sibir” are the project’s operators. As of today, 13 bln. RUB were invested in the project, and about 30 bln. RUB will be invested before 2022.
  • Integrated home-building factory (Naro-Fominsk district, Moscow region). The project was implemented by the “Morton” group of companies along with “Rosnano”. Investment volume accounted to 9 bln. RUB. More than 1000 jobs were created.
  • Manufacturing and storage facility of the Swedish cosmetics company “Oriflame” (Noginsk, Moscow region). Investment volume accounted to 8 bln. RUB. More than 800 jobs were created.
  • New meat processing complex of the “Miratorg” agribusiness holding (Vygonichskiy distrct, Bryansk region). Investment volume accounted to 7,9 bln. RUB. 850 jobs were created.

In 2013, the President of Russia supported the plan of Business Russia "New Industrialization-2025". This document involves the yearly creation of about 2 million high-productive jobs during 12 years. Thus, the real industrialization of the economy in Russia is yet to come, and its approval as a competitive country. To achieve this it is necessary to keep 255 th. of active enterprises and try to increase their number to 300 th. by 2025.

It should be noted that in the current economic conditions there are no mass ambitious statements about the suspension of investment projects or refusal of them. Not by chance the experts in the field of economy predict a rise in the Russian economy already in 2016, but situations in the market like it was in December 2014 are still possible.