Changes in Trade Regulations: New Challenges Facing Businesses

Dr. Alina Lavrentieva
Partner, Consumer Industrial Products Services

The global financial crisis, together with a shift in market dynamics, is significantly affecting businesses going through serious changes. Major reforms in state trade regulation are no exception. Among the key drivers in this process have been amendments introduced under Federal Law No. 381-FZ of Dec. 28, 2009, “On the Fundamentals of the State Regulation of Trade in Russia” (“the Law”), which took effect on Feb. 1, 2010, except for restrictions on the expansion of retail chains, which will come into force for municipalities and city districts on July 1, 2010. The Law is chiefly aimed at balancing economic interests between companies engaged in trade activity and their suppliers.

A significant number of the Law’s provisions deal exclusively with relations connected with the supply of food products. Food products are defined under the Law as natural or processed products that are traded and used for nutrition, including baby food and health foods, bottled drinking water, alcoholic products, beer and beer-based drinks, nonalcoholic drinks, chewing gum, food supplements and biologically active additives.

In our view, the most significant of the Law’s provisions are those governing relations between trading companies and the suppliers of food products.

The Law introduces a number of limitations with respect to the option for a trading company to require bonuses from a supplier of food products. In particular, the Law provides for the following limitations: A supply contract may prescribe a bonus payable to a trading company for the purchase from a supplier of a certain volume of food products. The amount of such a bonus should be included in the price of the supply contract but cannot affect the prices for food products. The amount of such a bonus cannot exceed 10 percent of the purchase price of the food products. Establishing a bonus in relation to socially essential food items, a list of which is established by the government, is not permitted. No other types of bonuses should be included in the price of the food supply contract.

Food supply contracts cannot contain provisions on the rendering by the trading company of advertising, marketing and similar services or on the undertaking of certain actions by the trading company aimed at promoting food products. The execution of a supply contract should not depend on the execution of a contract on the provision of the above services. Notably, advertising, marketing and other similar services aimed at the promotion of food products may be rendered by a trading company only under a separate fee-based service contract.

The provisions are designed to bring to an end the practice whereby the supply of food products depended on a number of additional conditions for suppliers, such as the requirement to pay entry bonuses, and so on. Such a practice will now be prohibited, though trading companies can continue providing suppliers with services to promote food products under separate fee-based service contracts.

Although the Law’s provisions are only just starting to have an effect, they are creating a number of practical questions for both trading companies and suppliers of food products. In particular, the question arises as to whether the 10 percent bonus limitation applies to relations governing the supply of food products to nonchain retailers and wholesalers. Other issues of note are whether the 10 percent bonus limitation applies to discounts (including so-called “retro-discounts”) or to the prices of individual or all food products supplied under a contract; can the bonus be fixed as an absolute amount (such as 1 ruble per each stock-keeping unit purchased); and how should the bonus be accurately calculated — should it be based on the price that includes or excludes VAT?

Questions have also been raised regarding the services used to promote food products, specifically: Does displaying goods constitute a service provided by a retail chain, and if so, how can its value be determined? Can a supplier provide services to a retail chain under a food supply contract, by leasing shop equipment for example?

We believe that the Law raises many questions that need to be looked at carefully, both by trading companies and suppliers. In our opinion, any decisions should be based on a close examination of all issues — including those related to commercial, legal and tax. This of course will involve time and resources but will also help businesses to avoid mistakes and minimize risks.