President Vladimir Putin issued a decree introducing a special procedure for the repayment of debt by Russian state bodies as well as Russian residents (Russian debtors) to non-Russian creditors connected with foreign states who commit “actions hostile to Russia” or controlled by these non-Russian creditors (referred to as “hostile state creditors”). The new procedure will apply to payments exceeding 10 million rubles ($95,000) per month and will effectively prevent the free receipt of repayment amounts by hostile state creditors.

This new decree no. 95, entitled “On the Temporary Order for the Discharge of Obligations to Certain Foreign Creditors” (Order) was published on March 5, 2022 and is effective from the date of its publication. According to the decree, a Russian debtor may choose to repay a hard currency debt owed to a foreign creditor in rubles at the official exchange rate of the Central Bank of Russia (CBR) (which is likely to be lower than the exchange rate of the market ).

Who are the creditors of hostile states?

On March 7, 2022, the Russian government determined the initial list of countries committing “hostile actions towards Russia”, which included the United States, Canada, European Union, United Kingdom, Ukraine, Montenegro, Switzerland, Albania, Andorra, Iceland, Liechtenstein, Monaco, Norway, San Marino, North Macedonia, Japan, South Korea, Australia, Micronesia, New Zealand, Singapore and Taiwan. This list could be expanded if more countries impose sanctions on Russia.

Which debt is subject to new restrictions?

The debt subject to the restrictive measures includes loans, credits and financial instruments. Technically, prepayments under export contracts are not mentioned in the Decree, although it is not clear whether this Decree will apply to debt resulting from prepayment commercial transactions.

Reimbursement of debt to hostile state creditors

If the debt is owed to a creditor of a hostile state, a Russian debtor can pay the ruble amount of the debt to a special account type “C” opened in the name of a foreign creditor or a foreign agent holder of titles. This account can be opened with a Russian or non-Russian bank (although it remains unclear how a foreign bank will be able to manage such an account) or, with regard to the obligations linked to the issue of securities, with of the National Bank. Settlement Custodian.

Although “C” accounts are opened in the name of foreign creditors, it appears that they can be opened at the request of a Russian debtor without the consent or any other involvement of a foreign creditor. The regime of these accounts will be determined by the CBR and the holders of these accounts will only be allowed to carry out a limited number of transactions (for example, to carry out transactions with securities registered in type “C” accounts, to carry out tax payments or make transfers between these “C” accounts). Currently, holders of “C” accounts are not allowed to convert rubles credited to these accounts into foreign currencies and/or to transfer amounts from “C” accounts outside of Russia.

Repayment of debt to other foreign creditors

If the debt is owed to a foreign creditor who is not a hostile state creditor, a Russian debtor may choose to discharge the debt in ruble equivalent calculated at the official CBR exchange rate on the date of payment. No payment to a special “C” account is required in this case, and a foreign creditor can convert the funds into foreign currency and transfer them out of Russia.

Anti-avoidance provisions

The decree specifically limits potential circumvention of the rule by assigning debt from a hostile state creditor to a Russian creditor or to a foreign creditor who is not a hostile state creditor. If such an assignment takes place after March 1, 2022, the Russian or foreign creditor concerned will be treated in the same way as a hostile State creditor (i.e. a Russian debtor can make a payment discharge of debt to a restricted creditor “account C”).

Certain exemptions

The special debt forgiveness procedure stipulated by the decree does not apply to persons directly or indirectly (including through hostile state creditors) controlled by Russian residents or the Russian state if the ultimate beneficiaries of the payments are Russian citizens and companies and that this information has been disclosed to the Russian tax authorities.

The decree provides that the CBR (with respect to Russian debtors who are financial institutions) and the Ministry of Finance (with respect to other Russian debtors) are empowered to determine alternative procedures for the repayment of debt to creditors. strangers. Until these procedures are adopted, Russian debtors may receive individual approvals from the competent authority to fulfill obligations outside the framework of the decree.

Impact on existing credit facilities

Most international credit facility agreements contain a monetary indemnification clause which provides that if an amount owed by a debtor to the creditor must be converted into another currency for a specific purpose, the debtor must indemnify the creditor for any loss, cost or liability arising from the conversion. In addition, most credit facilities provide that repayment must be made in “immediately available” funds and payment into a “C” account is unlikely to be considered an “appropriate” repayment. However, such provisions in credit agreements are likely to be unenforceable in Russia to the extent that the decree applies to the loan concerned.

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CONTACTS

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Ukrainian working group
Giovanna M. Cinelli
Joanna Christoforou
Bruce Johnson
Grigory Marinchev
Michael Maslin
Kenneth J. Nunnenkamp
Georgia M. Quenby
Christina Renner
Melanie Ryan
Vasilisa Strizh
Carl A. Valenstein
Alexei Chertov
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Nicholas Kelly
Christian Kozlowski
Daniel Lopez Rus
Charles C. Rush
Eli Rymland-Kelly