The Central Bank of the Russian Federation has recently been active in adopting secondary legislation clarifying and implementing presidential decrees on cross-border transactions. Such legislation imposes new restrictions which need to be considered in commercial dealings involving Russia.
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 a permission to make direct payments in the contractual currency is granted by either the Central Bank of the Russian Federation ( CBR) or the Ministry of Finance.
Most international loan agreements provide that in the event of the borrower’s failure to make a payment in the currency and to the account specified in or pursuant to that loan agreement, an event of default would occur granting the foreign creditor a right to accelerate the whole outstanding loan. It would also be common for a loan agreement to include a clause to the effect that if the borrower’s indebtedness owed to another creditor is accelerated—or becomes able to being accelerated—then the lender under that loan agreement would also be entitled to accelerate the loan (a so-called cross-default clause).
On April 4, 2022, the CBR issued Official Clarification No. 3-OR (the Clarification). The Clarification provides that if a Russian borrower made payment to a foreign creditor in Russian rubles in accordance with Decree No. 95, then, even if that foreign creditor declares that a default had occurred as a result of such (improper) payment, the Russian creditors of that borrower are not entitled to declare cross-default under their loan agreements.
While the obvious purpose of the Clarification is to protect Russian businesses from the domino effect–like insolvencies, it emphasizes that Russian lenders shall treat payments in Russian rubles under Decree No. 95 as due and proper discharge of Russian obligors’ obligations. It is expected that, as a result, Russian lenders participating in international syndicates may be reluctant to vote for the acceleration based on non-payment or cross-default provisions. This may create difficulties in reaching the requisite majority (typically two thirds of commitments in the loan) for declaring a default.
Russian currency control law historically provided for a harshly enforced “repatriation rule,” requiring Russian residents to receive into their Russian accounts repayments of loans made to foreign borrowers and payments for the goods, services, and IP rights supplied outside Russia. Failure to comply with this repatriation rule could result in a fine of up to 100% of the transaction value, and even criminal liability of the company’s officers.
In 2020 and 2021, the liberalization of currency control law resulted in the repatriation rule being repealed for many types of contracts, including the export of goods (other than commodities), services, works, and IP rights. Partial liberalization also extended to the export of commodities.
Presidential Decree No. 79 dated 28 February 2022 (Decree No. 79), requires Russian residents to sell 80% of receipts in foreign currency on a rolling basis. In the Clarification, the CBR explained that this rule implies that Russian residents must receive all foreign currency payments under cross-border deals into their Russian accounts, irrespective whether a particular type of contract is exempt from the repatriation rule. In essence, the CBR reintroduced the repatriation rule for all contracts denominated in foreign currency, which had previously been exempt from this rule.
The repatriation rule restricts the set-off (save in certain instances). Since February 24, 2022, set-off became an increasingly popular instrument used by international businesses for netting mutual obligations between offshore holding companies and their operating subsidiaries in Russia. The Clarification effectively restricts this practice for debts denominated in foreign currency.
It should be noted that Russian residents may receive individual approvals from the Government Commission in order to transfer foreign currency to bank accounts opened with foreign banks.
On April 1, 2022, the CBR Board of Directors issued Decision “On Establishment of the Amount of Certain Transactions of Residents and Non-residents’’ (the Decision), pursuant to which Russian residents may no longer make advance payments to non-residents exceeding 30% of the contract value under:
The Decision establishes a list of exceptions to this rule—for instance, the limitation does not apply to advance payments under financial services agreements.
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Ukraine Conflict Task Force
Giovanna M. Cinelli
Kenneth J. Nunnenkamp
Carl A. Valenstein
Jiazhen (Ivon) Guo
Katelyn M. Hilferty
Dr. Axel Spies