How are public procurement contracts affected by the EU’s decision on sanctions against Russia?

During the spring of 2022, the EU decided on a series of sanctions against Russia in response to Russia’s invasion of Ukraine. On 8th of April 2022, the EU decided on a fifth package of sanctions which includes, among other things, further restrictions on trade with Russia. One element of this is the extension of the list of controlled items which might contribute to Russia’s military and technological enhancements or the development of its defence and security sector, and restrictions have been imposed regarding goods for import and export, transactions, and financing and financial assistance, among others. In the context of these sanctions, the Regulation also introduces a new article that addresses public procurement contracts.

Published: 17. May 2022

The EU decision, which is implemented through Regulation 2022/576, prohibits the award and continued execution of public contracts and concessions with Russia. The adopted penalties are binding and must be applied in all EU Member States for contracts above the threshold values. The prohibition on awarding contracts will apply as from 9th of April 2022, and the prohibition on executing contracts will apply as from 11th of October 2022. Under the new sanctions, there is a prohibition on the award and continued execution of public contracts with:

i. Russian nationals, natural or legal persons, entities, or bodies established in Russia;
ii. legal persons, entities, or bodies in which an entity referred to in (i) above directly or indirectly owns more than 50 percent;
iii. natural or legal persons, entities, or bodies acting for, or on behalf of, an entity referred to in the previous items (i and ii above).

A corresponding prohibition also applies to suppliers, subcontractors, or entities whose capacities are being relied on in the procurement, if they account for more than 10% of the contract value.

The Regulation provides for the possibility of derogation from the prohibition, provided that the competent authorities have authorised the award and continued execution of contracts. The derogations provided for in the scheme relate to contracts involving, inter alia, nuclear technology, intergovernmental space programmes, critical technology for environmental radiation monitoring, and the production of medical radioisotopes or similar medical applications. The derogation also applies to purchases of natural gas and oil, diplomatic and consular representations in Russia, and contracts for the provision of strictly necessary goods or services which can only be provided, or can only be provided in sufficient quantities, by the persons or entities subject to the prohibition.

Continued application of the derogations requires the competent authorities to have authorised the award or continued execution of contracts. Member States which adopt such derogations must notify the other Member States and the Commission of any authorisations granted under the regulationwithin two weeks of the authorisation.

What effect will the regulation have in practice?

Russia’s ongoing invasion has raised many thoughts and issues of moral and business nature. Regardless of whatever one’s perspective may be on this matter, the EU’s decision and this regulation have now made it clear that contracting authorities and entities have a responsibility to check for the presence of Russian natural or legal persons or Russian economic interests in both new awards and existing contracts.  Where there are such interests or persons, contracting authorities or entities are required to act to ensure that contracts are phased out by 10th of October 2022. Similarly, tenderers and suppliers must secure their respective chains of subcontractors to ensure that the company is not affected by the sanctions.

Both politicians and the business community have expressed that this new regulation sends a strong signal to Russia, and the Swedish National Agency for Public Procurement welcomes the fact that the new sanctions specifically address public procurement. The National Agency for Public Procurement states that it creates a need for contracting authorities and entities to take stock of their contracts and consider, in particular, whether Russian economic interests are in play or may come into play by means of the contracts in question. It also raises questions as to whether contracting authorities need to draw up possible grounds for exclusion or otherwise take them into account with reference to the sanctions provisions of the Regulation.

The practical application of the regulation will develop over time, among other things through guidance from the National Agency for Procurement regarding handing public contracts in light of Russia’s invasion. In the meantime, caution is advised in connection with tendering, awarding, and concluding contracts where Russian interests may be involved.

Based on the current situation, it may be a good idea for both procuring organisations and Swedish companies which have been awarded public procurement contracts to take certain precautions. The type and scope of such precautions may, of course, vary depending on the type of activities and contracts involved. If there is a high degree of uncertainty or suspicions that there are now-prohibited contractual links with Russia, it could be reasonable and justified to undertake a systematic review of, and monitor, ongoing contracts of this nature. This would be a way to check whether there are circumstances which are affected by the sanctions and then act in accordance with Regulation 2022/576.

This article is written by partner Christoffer Löfquist and associate  Aida Alić. 


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