Russia Expands Restrictions on Government Procurement of Foreign Software and Hardware

Russia Expands Restrictions on Government Procurement of Foreign Software and Hardware

Over the last few years, Russia has been expanding restrictions on government procurement of software and hardware from foreign companies.

The initial restrictions were introduced in December 2013 when the Russian government issued Decree No. 1224, which contained prohibitions and restrictions on government procurement of foreign goods and services for the defense and security purposes. The restrictions did not apply to goods and services that were not available from Russian vendors.

Following events in Ukraine and the imposition of U.S. and EU sanctions, Russia declared import substitution as a major government policy. In July 2014, the Russian government issued Decree No. 656, which prohibited governmental and municipal entities from acquiring a wide range of machinery. IT hardware was not included in the list of prohibited items.

In November 2015, the Russian government issued Decree No. 1236, which prohibited government entities from acquiring foreign software effective January 1, 2016. It restricted government procurement to "domestic software" developed by Russian companies meeting specific criteria and listed in the State Register maintained by the Russian Ministry of Telecommunications. Decree No. 1236 allows procurement of foreign software only if a government purchaser can demonstrate that there is no domestic alternative in the State Register, in accordance with the procedures specified in Decree No. 1236.

Although prohibitions and restrictions contained in Decree No. 1236 expressly apply only to federal, regional, and municipal entities and organizations, there are indications that a number of state-owned companies have been implementing these restrictions as a matter of policy or have suspended procurement of foreign software pending further clarification from government authorities. In April 2016, the Russian government issued a ruling requiring governmental representatives appointed to the boards of state-owned enterprises ("SOEs") to "implement local sourcing requirements. In July 2016, the Russian government issued mandatory directives to the representatives on the boards of SOEs instructing them to call board meetings and vote for new procurement procedures requiring SOEs to purchase domestic software listed in the State Register.

Foreign vendors that may be able to sell software to Russian governmental entities and SOEs based on a "no adequate local alternative" exception may face yet another challenge in the form of Order No. 155, issued by the Russian Ministry of Economic Development and Trade in March 2014. Order No. 155, which deals with government procurement of foreign goods, requires contract prices for any foreign goods purchased pursuant to a government tender to reflect 15 percent discount from the winning bid price. Although by its terms Order No. 155 applies to government procurement of food, machinery, parts, and materials, in July 2016, the Russian General Prosecutor's Office took the position that the 15 percent discount must apply to procurement of foreign IT hardware, software, and related services as well.

These developments are likely to have a significant impact on foreign software and hardware vendors operating in the Russian market. While at this point, restrictions related to the procurement of foreign software and hardware apply only to state entities and likely SOEs, such entities comprise a very substantial share of the Russian software and hardware market. Furthermore, there is no assurance that such restrictions may not be extended eventually to the private sector.

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Sergei Volfson

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