Following Russian President Vladimir Putin's pronouncement that buyers from “unfriendly states” pay for Russian gas in rubles, it has been largely unclear, until recently, what this demand would imply in practice.
Decree No. 172, “On Special Procedure for Discharge of Obligations of Foreign Buyers to Russian Suppliers of Natural Gas” (Decree), effective as of March 31, 2022, provides that from April 1, 2022, payments for Russian gas shall be made in rubles and establishes a new procedure for gas supply payments. The March 31 Decree applies to “payment for supplies of natural gas in a gaseous state” and does not seem to apply to payment for liquefied natural gas (LNG) deliveries.
Arguably, the new payment procedure contemplated by the Decree, in principle, does not change key payment terms for existing foreign buyers of Russian gas. They are allowed to continue to pay in the currency established by their gas supply contracts with Russian suppliers, while the principal novelty is that all payments are now required to be made through special accounts that foreign buyers must open with Gazprombank in Russia, which then makes the conversion into rubles. However, as done on a unilateral basis (i.e., outside of contractual arrangements), Russia’s enforcement of the new payment requirements, arguably, can trigger claims for breach of contract.
Pursuant to the Decree, payments for the supply of Russian gas made after April 1, 2022, by (1) foreign buyers registered in any of the foreign states that “commit unfriendly actions against Russia, or Russian legal entities or individuals” (i.e., “unfriendly states”) or (2) other foreign buyers if the gas is supplied to any “unfriendly state” (collectively, Foreign Buyers) shall be made via Gazprombank in accordance with the procedure established by the Decree.
The Decree provides that, if a Foreign Buyer fails to comply with the new procedure, further gas supplies are to be suspended. Arguably, a suspension can trigger an event of default on the supplier side, subject to the terms of specific gas supply contracts. In practice, however, a Foreign Buyer’s failure to comply after April 1, 2022, would not immediately trigger suspension as payments on deliveries are typically made in advance, and therefore the actual suspension would most likely come into effect at a later date (e.g., the second half of April or May, depending on the terms of a particular gas supply contract).
On March 5, 2022, the Russian government published a list of “unfriendly states,” which consists of the following countries that have adopted sanctions on Russia: the United States, Canada, the European Union, the 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 may be expanded if more countries impose sanctions on Russia.
The Decree requires that Foreign Buyers open special type “K” accounts, denominated in rubles and foreign currency, at Gazprombank, an affiliate of Gazprom, in Russia.
The accounts are to be opened upon the application of the relevant Foreign Buyer; however, the physical presence of its representative at Gazprombank’s office in Russia is not required.
In order to pay for gas, the Foreign Buyer should deposit payments in the currency and amount specified in the gas supply contract into its foreign currency type “K” account. Gazprombank will then sell such foreign currency on the Moscow Exchange and deposit the ruble proceeds into the ruble type “K” account of the Foreign Buyer. Finally, Gazprombank will transfer such ruble proceeds from the type “K” account of the Foreign Buyer to an ordinary ruble-denominated account of the relevant Russian supplier. From that moment, the buyer’s payment obligation under the relevant gas supply contract would be deemed fully discharged.
Thus far, Gazprombank has been spared from most severe sanctions of the United States and European Union (including an EU ban on Russian banks transacting through the SWIFT system), but it is a “designated person” in the United Kingdom, meaning that its assets must be frozen and no funds or economic resources must be made available to Gazprombank or for its benefit.
Further, since 2014, the United States and European Union have prohibited certain dealings in new debt and new equity issued by Gazprombank, which has been extended recently in the European Union to prohibit (1) making or being part of any arrangement to make new loans or credit, regardless of maturity, after February 26, 2022; and (2) purchasing, selling, providing investment services for, assisting in the issuance of, or otherwise dealing with transferable securities and money-market instruments, regardless of maturity, issued after April 12, 2022. This, however, does not appear to have any immediate effect on the new gas payment arrangements (except for any UK buyers, which would not be able to transact with Gazprombank).
The Decree also expressly entitles the Central Bank of the Russian Federation’s board of directors to establish a different procedure for currency exchange for gas payments. At this time, we are unaware of any developments in terms of potential alternative currency exchange arrangements.
The Decree specifically restricts potential circumvention of its requirements through a debt novation from a Foreign Buyer to a third party. If such novation takes place, the new buyer will be treated as a Foreign Buyer.
Under Russian law, type “K” accounts are more protected from third parties’ claims than ordinary bank accounts. It is prohibited to suspend operations and seize or write off proceeds deposited with type “K” accounts for obligations not related to the relevant gas supply contracts.
In addition, it is envisaged that, unless respective amendments are made into the Russian tax and customs legislation, the prohibition to open bank accounts on taxpayers whose operations under bank accounts are suspended, as well as certain tax control obligations imposed on the banks otherwise established by Russian legislation, shall not apply to type “K” accounts.
The Russian Governmental Commission for Control over Foreign Investments may issue permits for Foreign Buyers to pay for natural gas supplies without observing the procedure established by the Decree. We are unaware of any such permits granted so far.
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 Note that the UK Office of Financial Sanctions Implementation issued General License INT/2022/1424276 authorizing the wind-down of positions involving various designated banks, including Gazprombank, until April 23, 2022.