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With the increasing risk of the scale of the conflict between Russia and Ukraine, the continuous spillover of the impact of the conflict and the large-scale fermentation of the impact on the international market, its impact has already spread to the global market, causing considerable changes in the global construction market, which will not affect our EPC business. underestimate.

my country's foreign engineering contracting business (EPC for short) has achieved rapid development. Among the world's 250 largest international contractors in 2020, including 74 Chinese-funded companies, topped the list, with an average international business accounting for 11.9% of global turnover. Among them, engineering projects in countries along the “Belt and Road” occupy an important position in my country’s foreign contracted engineering business. In recent years, my country’s contracted engineering projects in Russia and Ukraine have become more frequent, mainly in electric power, chemical industry, transportation, etc. Engineering construction in multiple key areas. With the increasing risk of the scale of the conflict between Russia and Ukraine, the continuous spillover of the impact of the conflict and the large-scale fermentation of the impact on the international market, its impact has already spread to the global market, causing considerable changes in the global construction market, which will not affect our EPC business. underestimate.

The impact of the Russian-Ukrainian conflict on our EPC business

Affected directly by the conflict between Russia and Ukraine, and the negative factors of comprehensive sanctions against Russia by the United States and the West, the projects in Russia and Ukraine will not be able to continue due to force majeure factors such as war or sanctions, which will not only result in a rapid decline in completed turnover, but also It may lead to the failure of the company's existing investment, and even need to bear the responsibility for breach of contract and compensation for failing to perform the contract on time. At the same time, the increasing uncertainty of the global environment will affect the progress and layout of my country's global EPC business.

First, as the scale of the Russian-Ukrainian military conflict continues to expand, various risks of our EPC business in Ukraine have increased sharply. First, the business risks under the contract conditions continue to increase. Since most of the Ukrainian engineering projects have a large proportion of advance payment, generally the payment is greater than the amount of work completed, our business risks in Ukrainian engineering risks will increase. The risk of suspension of default liability, etc.; the second is the increased risk of preservation of funds in Ukraine. At present, the currencies involved in our EPC business in Ukraine are mainly the currency of the country where the project is located, the intermediate currency and the RMB. The payment for the project itself is generally in the currency of the country where the project is located, and then part of it is remitted back to the country through the intermediate currency according to actual needs. However, due to the implementation of the project and the foreign exchange control of the host country, often not all funds can be exchanged in a timely, fair and effective manner. The rest of the currency is often stored in some banks in the host country. The war has led to the suspension of banking and other businesses, and the risk of project fund preservation will be affected. Third, the preservation risk of project materials and equipment will increase. After the Russian-Ukrainian conflict, a large number of contracted projects have not yet gone through the entrustment procedures for all the materials and equipment of the project. During the war, their materials and machinery and equipment will be affected by the war.

Second, due to the comprehensive sanctions and blockade of Russia by the United States and the West, our EPC business in Russia may be forced to suspend. First, the US-Western sanctions will affect the progress of our projects in Russia. The conflict between Russia and Ukraine has intensified the sanctions imposed by the United States and the West on Russia, and major countries in the United States and the West have formed a united front for multilateral sanctions against Russia. So far, the United States and the European Union have respectively announced seven and five rounds of economic sanctions against Russia. The United Kingdom and Canada also simultaneously imposed severe sanctions on Russia such as asset freezes and export controls. Japan, South Korea and Australia in the Asia-Pacific region also showed positive signs, announcing nearly five rounds of sanctions against Russia. Sanctions involve financial, military, scientific and technological aspects, including cutting off Russia's ties with SWIFT, prohibiting the export, sale or supply of any goods, services or technologies, suspending important projects, and sanctioning important personnel. On the one hand, affected by the sanctions, companies from these sanctioned countries cannot directly or indirectly sell their products to Russia, even if they sell related products to Chinese EPCs, and then Chinese EPCs sell them to Russia through engineering projects. The sanctions will seriously affect the progress of my country's EPC projects in Russia. On the other hand, Russia is an important exporter of my country's construction machinery. In the first half of 2021, my country's construction machinery exports to Russia accounted for 5.52% of the total, ranking second in the world. The export of construction machinery will be affected by secondary sanctions. Although Russia has promulgated the "parallel import" strategy, the problem has not been fundamentally solved in terms of the current degree of Russian restraint. Second, the upward pressure on global inflation has increased, and commodity prices have increased. The increase in the cost of purchasing materials and materials will lead to losses in our projects in Russia. Under the influence of the conflict between Russia and Ukraine, the supply chains of many important commodity markets, including crude oil, natural gas, steel, and various non-ferrous metals, have fallen into chaos. Commodity prices have risen to varying degrees, adding to the upward pressure on global inflation. Although the FIDIC contract terms contain a supplementary clause due to inflation, due to the constraints of the owner's project budget, this clause is often canceled in the bidding documents and contracts, and the contractor will absorb it in the bidding price.

Third, facing the uncertainty of the global political and economic environment, my country's EPC enterprises face many challenges in the development of the global market and the promotion of new projects. Since 2020, the outbreak of the new crown epidemic has spread globally, superimposed on the deep impact of the Russian-Ukrainian conflict on the global market this year, resulting in increased geopolitical and economic uncertainties, and the scale of the affected countries' engineering market has continued to decline. my country's overseas EPC business will face Great challenge. First, the downward pressure on the global economy is increasing, and the size of the overseas EPC market may decline. The Russian-Ukrainian conflict has led to increasing inflationary pressures in the European market. At the same time, traditional trade frictions and geopolitical risks have increased sharply. Global supply chains have contracted sharply. The countries affected by the Russian-Ukrainian conflict have three characteristics. One is a sharp decline: The economic growth rate has fallen sharply, international trade has fallen sharply, and the industrial chain and supply chain has fallen sharply; the second is a sharp increase: the unemployment rate has risen sharply, the government budget deficit has risen sharply, and the debt of various countries has risen sharply. The economic growth of the countries affected by the conflict between Russia and Ukraine has declined rapidly, the national fiscal revenue has dropped significantly, the support for major construction projects in terms of funds and other resources will decline, and the size of the overseas engineering market may decline; Second, the policy changes of various countries, The business environment faced by enterprises has undergone tremendous changes. The Russian-Ukrainian conflict has brought about huge changes in global geopolitics. Politicians from certain countries in the United States and the West use the Russian-Ukrainian conflict to stigmatize my country. The comprehensive containment of my "going out" development strategy and the implementation of B3W and other plans will make our enterprises face a more complex business environment.

The impact of force majeure risks on our overseas EPC business

First, the host country only defines the concept of force majeure without citing specific circumstances, which will bring the risk of force majeure to the enterprise's claim to rescind the international engineering contract. According to the territorial principle, the host country is the actual place where overseas engineering projects take place. Therefore, the entire process of investment, financing, engineering construction, insurance, and subcontracting of engineering projects in the host country should first comply with local laws and regulations. The project contractor should correctly understand the local force majeure laws and regulations and their application. The first is Article 617 of the Ukrainian Civil Code. The party who violates the obligation can be exempted from civil legal liability if it proves that the breach of the obligation was caused by an accident or force majeure. According to the Ukrainian Chamber of Commerce and Industry Law, the "force majeure situation" is clearly expressed in Article 14.1, paragraph 2: special and unavoidable circumstances that objectively make the obligations stipulated in the contract (agreement, agreement, etc.) as well as laws and regulations. The performance of the prescribed obligations becomes impossible. It should be noted that the definition of force majeure stipulated in the Law on Ukrainian Chambers of Commerce and Industry is only applicable to the scope of matters in which the Ukrainian Chamber of Commerce and Industry applies for force majeure certificates and can issue certificates. If the parties to the contract have disputes over whether it constitutes force majeure, the court still needs to decide, and the certificate is only used as evidence to assist the court in its judgment. Second, Article 401, Paragraph 3 of the Civil Code of the Russian Federation stipulates that a party who fails to perform or properly perform contractual obligations in commercial activities cannot prove that the failure to perform the contract is force majeure, that is, caused by unforeseen special circumstances. , you need to bear the responsibility for breach of contract, unless otherwise stipulated by law or contract. Looking at the provisions on force majeure in Ukrainian and Russian laws, the legal effect is that both parties to the contract are exempted from liability for breach of contract when force majeure occurs, and they can exercise the right to terminate and rescind when the negotiation fails. However, we need to pay attention to the fact that although both Russia and Ukraine have proposed the concept of force majeure, it has not been specifically listed in the articles, which brings certain risks to the company's claim to rescind the international engineering contract.

Second, the Russian judiciary usually determines that economic sanctions and their responses are not force majeure, and will bring additional business risks to our enterprises. In Russian law, force majeure is one of the reasons for exempting the parties from liability for breach of contract or tort. However, the Russian judicial authorities have identified economic crisis, currency appreciation and economic sanctions and their responses as not being force majeure. According to the arbitration of the Republic of Bashkirstan, Russia According to the court's judgment No. А07-12459/2015, the Russian side determined that the sanctions and their response were not specific circumstances of force majeure, and rejected the contractor's claim of force majeure. In the context of continuous and comprehensive sanctions against Russia by the United States and the West, domestic overseas project contractors in Russia should take into account the possible impact of sanctions on Russia in advance. Regarding the assertion of force majeure clauses in the conflict between Russia and Ukraine, companies should follow their own projects. and the actual situation of the host country to make specific analysis and overall judgment decision-making, to minimize the impact of the conflict, so as to maximize the interests of both parties. There is no uniform standard for force majeure in different countries. The actual situation of each country affected by the situation in Russia and Ukraine is different. The standards for determining this are different, and the legal force majeure rules for each country are also different. In the process of understanding and applying force majeure in overseas projects, various factors such as the law of the host country, the applicable law of the project contract selection, the specific provisions of the project contract terms and the actual impact on the project should be comprehensively considered. If you blindly advocate the cancellation of the international engineering contract, there will be a disadvantageous situation of losing both sides.

How to reduce the loss of our overseas projects after the Russian-Ukrainian conflict

First, construct feasible contracts and legal remedies to minimize the losses of Chinese-funded enterprises. At present, the conflict situation between Russia and Ukraine is still unclear. For EPC projects that have not been affected by the current situation, in addition to ensuring the safety of personnel and equipment, they should also pay attention to the dynamics of the conflict in real time and be ready to activate emergency plans at any time. For EPC projects that have been affected by conflicts, equipment trusteeship, collection and photography of on-site evidence must be done, and force majeure notices and preliminary claims reports must be issued in accordance with the engineering contract or the time limit stipulated by the applicable laws of the contract, and the suspension, extension, Contract termination, guarantee disputes, claims, compensation claims, etc., to build feasible contracts and legal remedies to minimize the losses of Chinese-funded enterprises under the Russian-Ukrainian conflict.

Second, coordinate the overseas project cycle and project goals, and reduce the impact of the uncertainty of international market fluctuations on our side. Chinese enterprises need to further adjust the allocation of global resources, concentrate more resources on maintaining and strengthening the main markets and major industries of enterprises, and do not spread too much. It is necessary to make good plans, arrange business reasonably, discuss with the owner of the country where the EPC business is located to determine the appropriate project cycle and project goals, and reduce the impact of the uncertainty of international market fluctuations on our side.

Third, analyze the claim of force majeure under the EPC contract in the Russian-Ukrainian conflict, and study the possibility and specific plan of claiming based on force majeure. First, issue a force majeure notice to the host country in a timely manner. The EPC contract usually stipulates that the contractor shall issue a force majeure notice to the owner within a certain period of time after becoming aware of (or should have become aware of) force majeure, otherwise he will lose the right to claim force majeure. The second is to issue a notice of claim in a timely manner. EPC contracts usually provide that the contractor shall, within a certain period of time after becoming aware (or should have become aware of) of the event giving rise to the claim, give notice of the claim to the owner, otherwise the contractor will be deemed to have waived the right to claim. The third is to reduce the impact and loss caused by force majeure events as much as possible. If the contractor and the owner reach an agreement on the replacement of the supply plan, the construction unit and the resulting changes in the contract price and construction period through contract modification, or the insured claims through force majeure When reaching an agreement with the owner on the changes in the contract price and construction period, it is necessary to obtain the consent of Sinosure in a timely manner, and apply for corresponding changes to the insurance policy/guarantee.