Russian Decree No. 430 was signed on July 5, establishing a basic framework for the replacement of Eurobonds with Russian bonds. The Decree also confirms that debts owed to Russian participants of international syndicates of banks must be repaid directly—not through facility agents from “unfriendly states”—and in rubles at the lender’s option, but at the same time substantially relaxes the repatriation rule with respect to exempt contracts.
Russian borrowers recently encountered difficulties in servicing their foreign debts, especially debts under bonds issued outside Russia and denominated in foreign currencies (Eurobonds). Such difficulties ranged from technical payment delays to payment agents freezing payments due to the bondholders because of sanctions and thus putting the issuers into default.
In an attempt to address these difficulties, Presidential Decree No. 430 provides that Russian borrowers are entitled to issue Russian bonds in the same currency and on the same commercial terms (nominal value, maturity date etc.) as the Eurobonds of the corresponding offshore issuers. The Decree provides that either (1) the issuance of Russian bonds to the foreign Eurobonds holders; or (2) the purchase by the Russian residents of Eurobonds for the funds raised from the Russian bonds issue would be considered a due and proper discharge of the issuers’ obligations under Eurobonds.
Moreover, Russian borrowers are now required to pay Eurobond holders holding their Eurobonds through Russian depositaries in the manner prescribed by the Central Bank of Russia (that is, most likely not through the foreign payment agent), or by delivering to them Russian bonds in exchange of Eurobonds.
Same as with the repayments of Russian lenders in syndicated loans (as discussed below), this regulation is likely to result in defaults of the Russian Eurobonds issuers. At the same time, the new procedure provides an opportunity for individual Eurobond holders to convert their Eurobonds (coupon payments on such Eurobonds may be frozen) into Russian bonds and receive coupon payments in Russia. Bondholders, however, should be wary of Russian law restrictions applicable to foreign residents regarding money transfers and other transactions within Russia.
It is expected that more detailed procedures for the replacement of Eurobonds with Russian bonds will be published by the Central Bank of Russia in due course.
The Government Commission on Control over Foreign Investments (presided by the Russian prime minister) (Commission) “recommended” on May 30 that Russian borrowers repay their debts owed to Russian participants of international syndicates directly and not through facility agents from “unfriendly states” (which include most countries that imposed sanctions on Russia).
If borrowers did not comply with the “recommendation,” the Commission threatened to cease granting permissions to service the international debt of such borrowers without complying with Presidential Decree No. 95. This Decree requires that Russian borrowers make payments to foreign creditors from “unfriendly states” 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.
Presidential Decree No. 430 now contemplates that Russian borrowers as well as Russian guarantors and security providers for Russian borrowers are obliged to repay Russian participants of international syndicates directly. This is now an explicit requirement rather than a mere “recommendation” of the Commission as it was before. Moreover, such repayment shall be made either in the contractual currency or in rubles at the request of the Russian lender that is being prepaid or, alternatively, in the currency agreed between the borrower and the lender.
The lender’s option to demand repayment in rubles has been likely designed to release the borrowers from potential liability under non-Russian laws for breach or circumvention of sanctions, if payments are to be made to the sanctioned banks.
As mentioned above, Presidential Decree No. 95 requires that Russian borrowers make payments to foreign creditors from “unfriendly states” in Russian rubles 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.
Presidential Decree No. 430 now provides that such consent can only be granted if Russian borrowers/issuers follow the procedures described above. Otherwise, the consent to make payments in foreign currency must be obtained directly from the Russian government, rather than from the Central Bank of Russia or the Ministry of Finance.
Presidential Decree No. 430 effectively presents Russian companies with a difficult choice between (1) following the payment procedure through the facility/payment agent but being required to make payments attributable to foreign lenders/Eurobond holders to special blocked accounts in Russia, or (2) disregarding the terms of the loan agreements or Eurobond issues and making payments bypassing the facility/payment agents or issuing Russian bonds. Whatever option is chosen will likely result in a breach by the borrower/issuer of the underlying agreement.
The Central Bank of Russia’s Official Clarification No. 3-OR dated April 4, 2022 (Clarification) interpreted Presidential Decree No. 79 in a way that effectively reintroduced the “repatriation rule” (which requires Russian residents to receive all foreign currency payments under cross-border deals into their Russian accounts) for all contracts denominated in foreign currency, notwithstanding that certain types of contracts had previously been exempt from this rule by law.
Presidential Decree No. 430 now requires Russian residents to repatriate foreign currency under such exempt contracts only in the amount corresponding to the percentage of the currency proceeds required to be sold on the Russian market. Pursuant to Presidential Decree No. 79, such percentage is being determined by the Commission from time to time, and currently stands at 0% of the currency proceeds.
Consequently, the “repatriation rule” with respect to the exempt contracts previously introduced by the Clarification has effectively been repealed. If, however, the Commission decides to increase the required threshold for the sale of currency proceeds in the future, the “repatriation rule” would apply to such exempt contracts again.
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