Russian Defence Procurement Law

Legal Framework

Russian defence procurement is governed by the Federal Law on State Defence Procurement (No. 275-FZ of 29 December 2012), known as the Gosoboronzakaz Law. The law establishes the legal framework for the procurement of goods, works, and services for the purposes of state defence and national security, including the development, production, modernisation, repair, and disposal of military equipment and weapons systems. The law replaced the earlier Federal Law No. 60-FZ of 1999 and introduced a significantly more centralised and controlled procurement regime.

The Gosoboronzakaz Law operates alongside the general procurement framework under the Federal Law on the Contract System (No. 44-FZ of 5 April 2013) and the Federal Law on Procurement by State Corporations and Natural Monopolies (No. 223-FZ of 18 July 2011). However, defence procurement is subject to special rules reflecting the sensitivity of defence information, the strategic importance of defence industries, and the requirement for guaranteed supply continuity.

The Gosoboronzakaz System

The Gosoboronzakaz (state defence order) is the central instrument of Russian defence procurement. The State Armament Programme (Gosudarstvennaya programma vooruzheniya), approved by Presidential Decree for 10-year periods, establishes the strategic priorities for defence procurement. The annual state defence order is then formulated by the Ministry of Defence in coordination with other security agencies and approved by the Government as part of the federal budget process.

The system operates on the principle of single state customer (ediny gosudarstvenny zakazchik): the Ministry of Defence serves as the primary customer for defence procurement, with other security ministries — including the Federal Security Service (FSB), the National Guard (Rosgvardiya), and the Ministry of Internal Affairs — acting as customers for their specific requirements. The Federal Service for Defence Procurement (Rosoboronzakaz) oversees compliance with procurement legislation and exercises control functions.

Classification and State Secrets

Defence procurement is closely linked to the state secrets regime. The Law on State Secrets (No. 5485-1 of 21 July 1993) classifies information in the areas of military, foreign policy, economic, intelligence, and counterintelligence activities. Procurement-related information that qualifies as a state secret includes: data on the production capacities and plans for strategic weapons; data on the development, production, and volumes of military equipment; and information on the deployment of military assets.

Participants in defence procurement must hold security clearances appropriate to the classification level of the contract. The security clearance procedure is governed by Government Decree No. 63 of 6 February 2010, which establishes the procedure for access to state secrets. Executors of state defence orders must maintain structural subdivisions for the protection of state secrets and implement physical, technical, and organisational security measures. Violations of the state secrets regime in the context of defence procurement carry criminal liability under Articles 283 and 284 of the Criminal Code.

Pricing Regulation

The Gosoboronzakaz Law establishes a distinctive pricing regime for defence contracts. The primary objective is cost containment through state regulation of prices and profit margins. Article 6 of Law No. 275-FZ requires the use of state-regulated prices for defence products included in a government-approved register. Prices are determined by the Federal Antimonopoly Service (FAS) in coordination with the Ministry of Defence and the Ministry of Industry and Trade.

The pricing methodology is based on the principle of economically justified costs (ekonomicheski obosnovannye zatraty) plus a fixed profit margin. The Fixed Profit Margin (fiksirovannaya pribyl) is calculated as a percentage of the contractor’s own costs, generally ranging from 1% to 20% depending on the complexity and strategic importance of the product. The FAS exercises price control through the mandatory pricing expertise (ekspertiza tsen) procedure, examining the contractor’s cost structure and verifying the economic justification of each cost component.

The pricing regime has been controversial. Defence industry enterprises argue that the fixed profit margin is insufficient to support modernisation investment. The state counters that cost-plus pricing creates incentives for cost inflation and inefficient production. The tension between cost control and industry sustainability has produced frequent amendments to the pricing regulations and periodic adjustments to profit margin rates.

Banking Support

Law No. 275-FZ introduced a banking support (bankovskoe soprovozhdenie) mechanism for defence contracts. Each state defence order is assigned to an authorised bank selected by the government. The authorised bank — typically one of the state-controlled banks, such as Sberbank, VTB, or Gazprombank — opens dedicated accounts for the state customer and each contractor and subcontractor in the procurement chain.

The banking support mechanism ensures traceability of funds: all payments under the contract flow through the dedicated accounts, and the authorised bank monitors compliance with payment schedules and the intended use of funds. The bank reports to the state customer on the movement of funds and any irregularities. This mechanism was designed to combat the misappropriation of defence funds, increase transparency of contractor finances, and provide the state customer with real-time visibility into the financial flows of the entire procurement chain.

Performance Tracking and Liability

The Gosoboronzakaz Law establishes detailed requirements for contract performance monitoring. The Ministry of Defence exercises control through the State Customer Automated Information System (GAS Gosoboronzakaz), which tracks compliance with delivery schedules, quality standards, and budget execution. Contractors must submit regular reports on progress, costs, and production outputs.

The liability regime for non-performance is strict. Contractors that fail to meet delivery schedules, quality standards, or cost targets face penalties including: forfeiture of performance bonds; reduction of the guaranteed profit margin; exclusion from future defence procurement for a specified period; and inclusion in the register of unreliable suppliers. Criminal liability under Article 201.1 of the Criminal Code (abuse of authority in the execution of the state defence order) applies to intentional violations causing substantial harm to state interests. The strict liability regime reflects the strategic importance of defence procurement and the state’s determination to ensure the reliability of the defence industrial base.