A new statement from the Russian Ministry of Finance requires Russian borrowers to repay debt owed to Russian lenders participating in international syndicates directly (bypassing mechanisms established by the relevant loan agreements). This requirement may potentially result in large-scale defaults of Russian borrowers.
Presidential Decree No. 95 dated March 5, 2022 (Decree No. 95), requires that Russian borrowers make payments to foreign creditors from “unfriendly states”—which include most countries that imposed sanctions on Russia—in Russian rubles (irrespective of the currency of the loan) to special blocked type “C” accounts, unless permission to make direct payments in the contractual currency is granted by either the Central Bank of Russia or the Ministry of Finance.
However, in the three months following the adoption of Decree No. 95, it became apparent that the Ministry of Finance was willing to grant permissions to blue-chip Russian borrowers to allow them to continue servicing their international debt in order to avoid defaults and enforcement proceedings against Russian assets abroad. As a result, despite regulatory restrictions, most international syndicates continued receiving payments from non-sanctioned Russian borrowers in due course.
Historically, major Russian banks regularly participated in such international syndicates. Following Russia’s operations in Ukraine, many of those banks became sanctioned in the United States, United Kingdom, European Union, or other jurisdictions. As a result, facility agents of international syndicates started blocking payments due to such lenders from Russian borrowers in compliance with the applicable international sanctions.
On May 30, 2022, the Ministry of Finance published an extract from the minutes of the meeting of the Subcommittee of the Government Commission on Control over Foreign Investments (presided by the Russian prime minister) (Subcommittee) No. 49 dated May 18, 2022.
In the extract, the Subcommittee “recommended” that Russian borrowers shall repay their debts owed to Russian participants of international syndicates directly and not through facility agents.
If borrowers do not comply with the “recommendation,” the Subcommittee threatened to cease granting permissions to service the international debt of such borrowers without complying with Decree No. 95. This should prompt Russian borrowers to treat the “recommendation” as a binding requirement.
Most international syndicated loan agreements provide that all payments thereunder must be made through a facility agent with very limited exceptions (usually when the facility agent fails to make a payment due from it under the loan agreement, becomes insolvent, or otherwise rescinds or repudiates the loan agreement). Failure to comply with this procedure would usually constitute an event of default, entitling the lenders to accelerate the entire loan.
The published recommendations effectively expose Russian companies to a difficult choice between (a) following the payment procedure through the facility agent but being required to make payments attributable to foreign lenders to special blocked type “C” accounts in Russia, or (b) disregarding the terms of the loan agreements and making payments to Russian lenders in syndicate bypassing the facility agents. Whatever option is chosen, it will likely result in the breach by the borrower of the underlying loan agreement.
As a result of the Russian Ministry of Finance statement, many Russian borrowers who have Russian banks in their international syndicates will likely end up in default under the respective loan agreements, unless the foreign lenders agree to vary the terms of the agreements allowing the payments to be made directly to the Russian banks.
However, this may not work with respect to those Russian banks that are subject to international sanctions. In that case, the foreign lenders may be viewed as assisting with making funds available to or for the benefit of the sanctioned banks.
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Ukraine Conflict Task Force
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Carl A. Valenstein
Dr. Axel Spies
Abaigael R. Clifford
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Charles C. Rush