Russia sanctions - what is still possible in public contracts?

For the first time since the start of the Russian war of aggression against Ukraine, the Sanctions Regulation (EU) 2022/576 has stipulated regulations for public procurement. The provisions are already in force and, from 11 October 2022 onwards, companies will have to ensure that there is no so-called connection with Russia also in their existing contracts. This also applies to the supply chain; otherwise there is a risk of the contract’s termination. In order to address this situation, public contracting authorities have recently started demanding so-called self-declarations, in which bidders are to declare that they have no connection with Russia. 

This current development has given us cause to explain once again the relevant Art. 5k of the EU Sanctions Regulation (cf. already our Newsletter on the fifth EU sanctions package) and the self-declaration. Art. 5k contains a prohibition on the award and performance of public contracts and concessions to the detriment of persons, entities and organisations that have a connection with Russia. 

Connection with Russia - who is affected?

According to the sanctions regime, such connection with Russia exists in the case of the following persons and organisations:

(a) Russian citizens or natural or legal persons, organisations or entities located in Russia,

(b) legal persons, organisations or entities in which more than 50 % of the shares are held, directly or indirectly, by one of the organisations referred to in (a); or

(c) natural or legal persons, organisations or entities acting on behalf of or at the direction of any of the organisations referred to in (a) or (b).

The provision does not only apply in the case of a direct connection with Russia, i.e. to applicants and bidders in the award procedure as well as contractors. Subcontractors, suppliers and companies whose capacities are used in the context of the bidder’s entitlement to rely on such capacities [“Eignungsleihe"] also fall under this provision if they account for more than 10% of the contract value (indirect connection with Russia).

The Sanctions Ordinance only makes provisions for public contracts and concessions if they reach the EU thresholds pursuant to Sec. 106 of the German Act against Restraints of Competition [Gesetz gegen Wettbewerbsbeschränkungen, GWB]. It contains no restrictions for public contracts and concessions below these thresholds.

What is still allowed and what is not?

In principle, bidders with a (direct or indirect) connection with Russia are prohibited from being awarded contracts in procurement procedures. To this end, public contracting authorities are increasingly demanding a self-declaration from applicants and bidders. This serves to ensure that the requirements of Art. 5k are met. A sample form is provided by the German Federal Ministry of Economics and Climate Protection [Bundesministerium für Wirtschaft und Klimaschutz, BMWK] on its website. If the declaration is not submitted or not submitted in full, this will lead to exclusion from the procurement procedure. The self-declaration is therefore of considerable importance.

A contract performance prohibition applies to existing contracts. This also affects contracts awarded before 9 April 2022, albeit with a transition period. The performance of these contracts is prohibited as of 11 October 2022. Contracts with a direct connection with Russia must have ended by this date. In cases with an indirect connection with Russia, the contractor must ensure, for example by replacing its subcontractors and suppliers, that there is no connection with Russia in the supply chain after 10 October 2022. If this is unsuccessful, the contract with the contractor must be terminated.

Any claims for damages in connection with terminated contracts are excluded under Art. 11 (1) of the EU Sanctions Regulation to the extent that the claim is asserted by a person or company with a connection with Russia.

As an exception to these prohibitions, Art. 5k (2) of the EU Sanctions Regulation provides for a reservation of approval. According to this, the competent authority may, upon the request of the contracting entity, approve the award or continuation of the contract if the contracts are intended for:

• the operation of civil nuclear capabilities, their maintenance, their decommissioning, the management of their radioactive waste, their supply and reprocessing of fuel elements, and the continuation of the planning, construction and acceptance tests for the commissioning of civil nuclear facilities and their safety, as well as the supply of source materials for the production of medical radioisotopes and similar medical applications, critical technologies for radiological environmental monitoring, and for civil nuclear cooperation, especially in the field of research and development,
• intergovernmental cooperation on space programmes,
• the provision of absolutely necessary goods or services if they can be provided exclusively or only in sufficient quantity by the persons referred to in paragraph 1,
• the activities of diplomatic and consular missions of the Union and Member States in Russia, including delegations, embassies and missions, or international organisations in Russia enjoying immunity under international law,
• the purchase, import, or transportation of natural gas and petroleum, including refined petroleum products, and titanium, aluminium, copper, nickel, palladium, and iron ore from or through Russia into the Union, except to the extent prohibited under the most recent oil embargo of 3 June 2022, pursuant to Articles 3m and 3n of the EU Sanctions Regulation; or
• the purchase, import or transport of coal and other solid fossil fuels listed in Annex XXII of the EU Sanctions Regulation until 10 August 2022.

The BMWK will shortly announce which authority is responsible for issuing this exemption. However, it is likely that applications will have to be submitted to the German Federal Office of Economics and Export Control [Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA], as the BAFA has also been responsible to date for issuing approvals in connection with Regulation (EU) 833/2014.

Practical implications

Public contracting authorities must and will take the new regulations seriously and act without undue delay. Bidders will therefore find themselves confronted with self-declarations on the exclusion of a connection with Russia in ongoing procurement procedures. To this end, companies will have to check whether they or their supply chain has a connection with Russia. Subcontractors and suppliers are to be notified accordingly (including documentation!) and are to be requested to submit corresponding declarations. The submission of a false self-declaration might not only lead to exclusion in the specific award procedure, but could also result in a ban on being awarded contracts in the future.

In the case of ongoing contracts, the termination of the contract is the worst-case scenario. For this reason, companies must also immediately clarify whether their contractors and suppliers can be ruled out as having a connection with Russia. If a subcontractor is found to have a connection with Russia that accounts for more than 10% of the contract value, they will have to be replaced by 11 October 2022. Please note in this respect that remuneration adjustments arising from general price increases in the course of the replacement of a subcontractor and supplier are only permissible within the legal framework of the procurement regulations; changes going beyond this may result in new tenders.

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