On 5 March 2022, the Russian President signed Decree* No. 95 “On the Temporary Procedure for Discharge of Obligations to Certain Foreign Creditors” (“Decree No. 95”), which establishes a temporary procedure for discharging certain financial obligations.
Procedure for discharging obligations
From 5 March 2022, the Russian Federation, constituent entities of the Russian Federation, municipalities and residents (“Debtors”) must discharge their obligations under loans and financial instruments to foreign persons (and their controlled persons, except for those registered in Russia) connected with states, which, within the meaning of Russian law, are committing “unfriendly acts” against the Russian Federation and Russian persons (“Restricted Creditors”), as well as certain other creditors, in accordance with Decree No. 95. The abovementioned states are listed in Russian Government Order* No. 430-r dated 5 March 2022 (“States”). They include, in particular, the EU member states, US, Canada, UK, Switzerland and Japan.
This procedure applies to obligations if their amount exceeds: (i) RUB 10m per calendar month, or (ii) the foreign currency equivalent of that amount at the official exchange rate fixed by the Central Bank of Russia (“CBR”) on the first day of each month.
Decree No. 95 also applies to the discharge by Russian legal entities of their obligations related to the issuance by foreign entities of foreign issue-grade securities (Eurobonds and depositary receipts).
Discharge of obligations to Restricted Creditors
In order to make payments to Restricted Creditors, a Debtor must apply to open a special type “S” rouble account in the name of a Restricted Creditor (or a foreign nominal holder). The application must be submitted to a Russian credit institution or, in the case of securities issuance, to a central securities depository. Type “S” accounts also include depo accounts opened in the name of either a Restricted Creditor or a foreign nominal holder before 5 March 2022.
A type “S” account may be a bank account, special brokerage account, clearing bank account, depo account or clearing depo account. The conditions of using type “S” accounts are set out in the Resolution of the CBR’s Board of Directors dated 18 March 2022* (“Resolution”).
Except for a number of specific cases established by the Resolution, a Restricted Creditor should submit an application for using funds credited to a type “S” account. The application must be submitted in the manner prescribed by the CBR (where obligations are performed by Russian financial institutions) or by the Russian Ministry of Finance (in the case of performance by any other Debtor).
Discharge of obligations to other creditors
In certain cases, Decree No. 95 also applies to the discharge of obligations to other creditors.
Firstly, obligations to foreign creditors that are not Restricted Creditors can be discharged in roubles in the amount of the rouble equivalent calculated at the CBR official exchange rate as of the payment date. Based on the wording of paragraph 1 of Decree No. 95, the foreign creditors that are not Restricted Creditors may include: (i) foreign persons not connected with the States or their controlled persons, and (ii) Russian entities controlled by foreign persons connected with the States. The CBR’s unofficial clarifications, which use the terms “creditors that are Russian residents” and “creditors from countries that have not joined the sanctions against Russia”, do not contain more detailed interpretations.
Secondly, obligations to residents whose securities are held in depo accounts with Russian depositories are discharged by transferring funds in roubles to the creditor’s account (without using type “S” accounts) in the amount of the rouble equivalent calculated at the CBR official exchange rate as of the payment date.
Thirdly, obligations to a foreign nominal holder are discharged by transferring funds in roubles to a foreign nominal holder’s type “S” account opened with a Russian depository in the amount of the rouble equivalent calculated at the CBR official exchange rate as of the payment date. Further transfers to the securities holders that are Restricted Creditors are made in the amount due under the terms of the securities issuance (less the payments to residents whose securities are held in Russian depositories and foreign creditors other than the Restricted Creditors).
The relevant provisions of Decree No. 95 may be aimed at establishing a mandatory procedure for discharging the regulated obligations to other creditors solely in the ways described above (irrespective of any provisions to the contrary in the contract or the applicable law). However, a final position on this issue can be determined after official clarifications are published.
Obligations assigned by Restricted Creditors
Decree No. 95 also applies to the discharge by the Debtors of obligations, which have been assigned by Restricted Creditors to resident creditors and foreign creditors who are not Restricted Creditors after 1 March 2022 or in certain cases, such as for credit institutions subject to the States’ sanctions*, other date determined by the CBR’s Board of Directors.
The assignment is mentioned in Decree No. 95 separately from the specific grounds for the discharge of obligations to creditors other than the Restricted Creditors. As a result, until authorities give any further clarifications, provisions in connection with assignments may be interpreted to fall within the general procedure for discharging obligations to Restricted Creditors.
Other procedures for discharging obligations
The CBR (if obligations are performed by Russian financial institutions) or the Ministry of Finance (in other cases) may determine other procedures for discharging obligations under loans and financial instruments. Until then, a permit to that effect may be issued by the CBR or the Ministry of Finance, respectively. As far as we are aware, Russian authorities have already commenced issuing such permits at the request of a number of Russian companies.
Exemptions for persons controlled by Russian beneficiaries
Decree No. 95 also establishes exemptions from the concept of foreign persons connected with States, as defined in the Russian President’s Decree* No. 81 “On Additional Temporary Economic Measures to Ensure the Financial Stability of the Russian Federation” dated 1 March 2022 (“Decree No. 81”). In particular, Decree No. 81 does not apply to making transactions with such persons if: (i) they are controlled by Russian beneficiaries, including through foreign persons, and (ii) such control is disclosed to Russian tax authorities.
We will continue to monitor these developments and keep you informed of any further changes.
* In Russian