Update: Russian Central Bank Imposes New Currency Control Restrictions | Morgana Lewis
The Central Bank of the Russian Federation recently adopted secondary legislation clarifying and implementing presidential decrees on cross-border transactions. This legislation imposes new restrictions that must be taken into account in business relations involving Russia.
BAN ON CROSS DEFAULT BY RUSSIAN LENDERS
Presidential Decree No. 95 dated March 5, 2022 (Decree No. 95) requires Russian borrowers to make payments to foreign creditors of “hostile states” – which include most countries that have imposed sanctions on Russia – in Russian rubles (regardless of currency of the loan) to blocked accounts of type “C”, unless permission to make direct payments in the contractual currency is granted by the Central Bank of the Russian Federation (CBR) or the Ministry of Finance.
Most international loan agreements provide that in the event the borrower fails to make payment in the currency and to the account specified in or under that loan agreement, an event of default will occur, granting the foreign creditor the right to accelerate the entire outstanding loan. It would also be common for a loan agreement to include a clause to the effect that if the borrower’s indebtedness to another creditor is accelerated – or becomes likely to be accelerated – then the lender under that loan would also have the right 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 has made a payment to a foreign creditor in Russian rubles in accordance with Decree No. 95, then even if that foreign creditor declares that a default has occurred as a result of such payment (undue), the creditors of this borrower do not have the right to declare a cross default under their loan agreements.
While the clear purpose of the clarification is to protect Russian businesses from domino-like insolvencies, it emphasizes that Russian lenders must treat Russian ruble payments under Decree No. 95 as a regular and proper discharge of obligations of Russian debtors. It is expected, therefore, that Russian lenders participating in international consortia will be reluctant to vote for acceleration based on non-payment or cross-default clauses. This can create difficulties in reaching the required majority (usually two-thirds of the loan commitments) to declare a default.
REINTRODUCTION OF REPATRIATION RULE FOR PREVIOUSLY EXEMPTED CONTRACTS
Russia’s Currency Control Law historically provided for a harshly enforced “repatriation rule”, requiring Russian residents to receive repayments of loans to foreign borrowers and payments for goods, services and intellectual property rights in their Russian accounts. supplied outside Russia. Failure to comply with this repatriation rule could lead to a fine of up to 100% of the value of the transaction, or even the criminal liability of the company’s managers.
In 2020 and 2021, the liberalization of the Exchange Control Act resulted in the repeal of the repatriation rule for many types of contracts, including the export of goods (other than commodities), services , works and intellectual property rights. Partial liberalization also extended to the export of basic products.
Presidential Decree No. 79 of February 28, 2022 (Decree No. 79), obliges Russian residents to sell 80% of foreign currency earnings on a continuous basis. In the clarification, the CBR explained that this rule implies that Russian residents must receive all foreign currency payments in cross-border transactions to their Russian accounts, whether or not a particular type of contract is exempt from the rule. of repatriation. In essence, the CBR has reintroduced the repatriation rule for all contracts denominated in foreign currencies, which were previously exempt from this rule.
The repatriation rule limits compensation (except in certain cases). Since February 24, 2022, netting has become an increasingly popular instrument used by international companies to offset mutual obligations between offshore holding companies and their operating subsidiaries in Russia. The Clarification effectively restricts this practice for debt denominated in foreign currencies.
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.
LIMITATION OF ADVANCE PAYMENTS UNDER CERTAIN AGREEMENTS
On On April 1, 2022, the CBR Board of Directors issued the Decision “On Establishing the Amount of Certain Transactions of Residents and Non-Residents” (the Decision), under which Russian residents may no longer make advance payments to non-residents exceeding 30% of the value of the contract under:
- service agreements,
- company agreements, and
- agreements for the transfer of information or intellectual property rights.
The Decision sets out a list of exceptions to this rule — for example, the limitation does not apply to advance payments under financial services agreements.