Acquisition Finance 2019

Last Updated November 07, 2019


Law and Practice


ALRUD Law Firm was established in 1991 by senior partners Maxim Alekseyev and Vassily Rudomino, and is widely recognised as one of the leading Russian law firms. The team extends to some 100 professionals, led by ten equity partners, who bring expertise and experience across the full range of legal services. ALRUD's banking and finance team has profound expertise in all kinds of financial and capital markets transactions, both domestic and cross-border; the team's considerable experience includes advising banks and financial institutions, as well as corporates, in various types of transactions. ALRUD's clients include blue-chip multinationals, privately owned companies and Russian state-owned enterprises; outside of the Russian domestic market, the firm's clients are spread across the UK, Europe, Asia, North and South America.

The Russian lending market may be generally characterised as a free market with substantial state regulation of the banks and financial institutions.

Large investment loans are mostly provided by state-owned banks (eg, Sberbank, VTB, Gazprombank, Rosselkhozbank); such banks continue to dominate the loan market. However, despite the fact that the market share of state-owned banks is constantly increasing, private banks still play a significant role in the Russian banking system. The following Russian private banks are noteworthy in respect to lending: Alfa Bank, Credit Bank of Moscow, Sovcombank, Russian Standard Bank and Bank Uralsib.

Foreign banks are also widely represented in Russia. They include major European players such as Unicredit Bank, Rosbank (Societe Generale Group), Raiffeisen, BNP Paribas, Asian financial groups such as ICBC, Mizuho Bank, China Construction Bank, and American entities such as Citibank.

In addition, Russian regional banks (eg, Ak Bars Bank in the Republic of Tatarstan, the Ural Bank for Reconstruction and Development in the Ural Region, Asian-Pacific Bank in Far East Region, Bank Saint Petersburg in Northwest Russia) also actively participate in lending activity, having strong relations with businesses located in their principal regions.

VEB.RF, a state development corporation, also actively participates in the market by providing financing to various businesses. During recent years VEB.RF is stepping away from providing a facility as a single lender. Instead, VEB.RF has created the Project Finance Factory, through which the state corporation supervises provision of syndicate loans and acts as a facility agent. The Project Finance Factory is a project finance mechanism for investment projects in Russia’s priority industries such as infrastructure, downstream industry, green economy.

Currently, more than 35 banks provide syndicated loans in Russia.

Russian banks actively provide financing for acquisition deals, consistently lowering interest rates for the past five years or so. However, average interest rates for loans provided by Russian banks are still higher than those provided by European banks. In addition, the Central Bank of the Russian Federation is trying to decrease the amount of loans provided for financing of M&A, because they believe that such loans do not facilitate the growth and development of Russian businesses. Elvira Nabiullina, a chairperson of the Central Bank of the Russian Federation, said in this regard: “We see that banks finance M&A deals with great pleasure, which is, in other words, financing of reallocation of property, but not business development”. It is expected that the Central Bank of the Russian Federation will increase capital requirements for M&A loans by the end of this year.

One recent trend is the active participation of Russian state banks in the M&A market, where they directly purchase or finance acquisition through SPVs, not being financial organisations. For example, in the course of 2018 and 2019 VTB Group has acquired a 29% stake in Magnit (the second largest Russian retail chain), a 20% stake in Channel One (the most popular TV channel in Russia), and a controlling stake in Mirogroup Resources, (the leading Russian grain trader). According to SovEcon, a Russian company specialising in agriculture markets research and consulting, VTB Group has become the largest owner of grain infrastructure in Russia.

In Russia, corporates (bonds) can be issued both in Russian rubles (RUB) and in a foreign currency (so-called eurobonds, usually issued through a foreign-law SPV). The vast majority of bonds traded in the domestic market are denominated in the national currency. Bonds issued in Russia can be divided into three large categories by type of issuer: state, corporate and municipal. The majority of corporate bonds are issued by companies doing business in the financial (41%) and oil and gas (34%) sectors.

The fastest-growing segment of bonds is the ferrous metallurgy sector, which grew by more than 60% for the last couple of years. The Russian corporate bond market is highly concentrated, with Rosneft being the largest issuer. The total value of bonds issued by Rosneft constitutes more than 40% of all bonds issued by non-financial companies; the second largest non-financial bond issuer is Russian Railways. VEB.RF and Sberbank are the biggest issuers among financial companies.

The procedure of issuance of bonds in the Russian Federation is specified by a number of regulations issued by the Central Bank of the Russian Federation, such as Standards of Issuance. The Central Bank of the Russian Federation is a Russian federal executive body, which is responsible for regulation, control and supervision of the capital markets as well as for the adoption of necessary rules and regulations for facilitation of trade on the Russian capital market since 1 September 2013.

Due to the dominant position of Russian state banks, which prefer Russian law in relation to financing deals, and major amendments of the Russian civil law (the law on syndicated loans, changes in regulation of credit and security agreements), Russia-based parties have chosen Russian law as the governing law of financing transactions more often during recent years. Companies owned by the state are also trying to choose Russian law as much as possible. However, use of English law as the law regulating corporate loans/acquisition finance/LBOs is still common practice in Russia.

Choosing Russian law, one shall keep in mind the following.

  • Russian law is historically resistant to committed loans. Although some improvements have been made, in practice it is still very uncommon to force a creditor to provide a loan or make him indemnify losses.
  • Russian law agreements use penalties as liability; there is a standard list of penalties, which the bank normally state in their agreements.
  • Russian court practice is resistant to the banks accelerating loans based on an event of default, which is not a non-payment issue. Those non-payment defaults shall be carefully considered before being announced.
  • Russian law is historically not open to agreement at the parties’ discretion, as compared to English law. Thus, a court can imply various imperative norms or even intervene and change the parties’ arrangements – for instance, to reduce penalties or invalidate an acceleration request in case of a non-payment event of default.
  • Although Russian practice has elaborated some standard approaches and forms of finance documentation, it is not currently well-maintained and is still under development.

In addition, rules of Russian private law prescribe that if parties to an agreement where a foreign element is absent (eg, no party is located outside of Russia, all securities are related to Russia) choose foreign law, the Russian court will apply all imperative rules of Russian law irrespective of their choice of law. Moreover, if a foreign element is present, Russian court may apply imperative rules of Russian law by reason of (i) direct provision in legislation to this effect, or (ii) their “special importance”.

If a dispute is resolved by a Russian court, the choice of a foreign law as the agreement's applicable law may lead to additional problems due to either a lack of understanding or the unwillingness of Russian courts to apply rules of a foreign law.

Therefore, it is common practice in Russia to submit such disputes to foreign courts or foreign arbitral tribunals. As to enforcement of the foreign arbitral tribunals, the Russian Federation (as successor to the Soviet Union) is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards dated 1958. Accordingly, a foreign arbitral award obtained in a state that is party to the New York Convention should be recognised and enforced by Russian courts. For example, the Federal Arbitrazh Court of the Ural District – under the decision dated 12 January 2011 on case No F09-10873/10-S5 – recognised the judgment of an international arbitration in Hong Kong on collection of a sum of money under the sale and purchase agreement. This arbitral tribunal acted under the rules of UNCITRAL, dated 15 December 1976.

With regard to awards made in the territory of non-contracting states, the Russian Federation applies the New York Convention only to the extent to which those states grant reciprocal treatment.

Judgments rendered by a court in any jurisdiction outside the Russian Federation are likely to be recognised by courts in Russia only: (i) if an international treaty providing for the recognition and enforcement of judgments in civil cases exists between the Russian Federation and the country where the judgment is rendered; and/or (ii) a federal law of the Russian Federation provides for the recognition and enforcement of foreign court judgments. The foreign court judgment may be recognised and enforced in case of unavailability of a mutual recognition treaty based on the principles of reciprocity and international comity (evidence that the foreign country where the judgment is obtained recognises and enforces the judgments of the Russian courts is a condition).

We note, however, that (as suggested above) in practice reliance upon international treaties may meet with resistance or a lack of understanding on the part of a Russian court or other officials, thereby introducing an element of delay and unpredictability into the process of enforcing any foreign judgment in the Russian Federation.

We also note that a special approach to foreign arbitration is adopted in respect of corporate disputes, which may be the case for an acquisition finance deal. Only accredited foreign arbitration institutions are authorised to award in Russian corporate cases involving corporate rights. Currently, only Hong Kong Arbitration has received such accreditation.

Syndicated loan agreements used in the Russian market used to be drafted based on English law standard forms prepared by the Loan Market Association (LMA) taking into account some special aspects related to the obligors incorporated in Russia.

However, on 1 February 2018, the federal law on the syndicated loans (the Syndicated Loan Law) entered into force. That law was adopted to establish clearer rules for provision of syndicated loans under Russian law and eliminate some legal gaps leading to serious risks on the lenders’ side. It should be noted that before the Syndicated Loan Law was been adopted, Russian banks granted Russian law governed syndicated loans based on general provisions of Russian civil legislation. For example, in 2015 the Association of Banks of Russia, with the support of leading banks and international law firms, has adopted the form of a syndicated loan agreement regulated by Russian law. This document is written in the Russian language and was developed based on the LMA form. However, we believe that after the adoption of the Syndicated Loans Law, amendments to the standard agreement will be made in the near future.

According to the Syndicated Loan Law, a syndicated loan agreement is a mixed agreement, containing elements of loan (credit) agreements, pledge management agreements, agency agreements and intercreditor agreements. The Syndicated Loan Law establishes that the syndicated loan agreement must be concluded in a simple written form; notarisation or registration of the agreement is not required, which makes this agreement flexible in terms of execution. The following organisations can act as lenders:

  • Russian credit organisations (including banks) and VEB.RF;
  • international financial organisations, international banks and other foreign legal entities, which are entitled to grant loans;
  • non-governmental pension funds, management companies of investment funds, mutual investment funds;
  • other Russian legal entities in cases specified by the federal law.

Only legal entities and individual entrepreneurs can act as borrowers in such syndicated loan transactions.

Despite the fact that adoption of the Syndicated Loan Law is a major step forward for Russian loan market in developing its own framework for provision of syndicated loans, which are generally coherent with international market practice, it has some disadvantages. For example, the Syndicated Loan Law has prohibited ordinary Russian companies from participating in syndicated loan agreements on the lender’s side, while, as stated above, foreign legal entities having the right to provide loans (ie, almost all foreign companies) are entitled to do so. In addition, the Syndicated Loan Law provides that fees of the facility manager shall be obligatorily paid by the lenders, which contradicts international legal practice, where all expenses connected with provision of the syndicated loans is on the borrower’s side.

Generally, loan documentation can be drafted in any language, but if the documents are to be presented to the Russian state authorities (for example, courts or notaries), they shall contain the prevailing Russian version (in case of bilingual documents) or contain a certified Russian translation. That could be the case, for example, if a loan agreement is secured by a mortgage agreement, which must be registered with Russian authorities.

Legal opinions in acquisition finance transactions are forms consistent with standard European practice for legal opinions issued with respect to loan agreements and cover, among others, the following issues.

  • Incorporation of the borrower and capacity to enter into the opinion document – a Russian law firm confirms that the borrower is duly registered, validly existing as a legal entity in the Russian Federation and has the capacity, power and authority under Russian law to enter into the opinion documents and to exercise its rights and perform its obligations thereunder.
  • Authorisations of the borrower – a Russian law firm confirms that the borrower has taken all necessary corporate actions under the laws of the Russian Federation to authorise the execution and delivery of the opinion documents.
  • Choice of law provisions – a Russian law firm confirms that choice of the applicable law of the opinion documents is a valid choice from the perspective of Russian law; it is especially important if a foreign law is chosen.
  • Validity and enforceability of the opinion documents – a Russian law firm confirms that the opinion documents are valid and enforceable from the perspective of Russian law.

A lot of acquisition finance transactions still involve companies incorporated in foreign countries (especially in English-law countries) in order to apply foreign financing instruments.

However, during the last two decades a lot of amendments to the civil legislation have been made in order to provide the possibility for businesses to structure complex financing transactions in Russian law.

The typical structure of acquisition finance transactions involves a facility agreement between the bank as a lender and an acquiring company or a target as a borrower. Obligations of the acquiring company are usually secured by a pledge over shares in the acquiring company and its assets, and shares and assets of the target company. The term of the loan does not usually exceed ten years.

Senior Loans

Although Russian law does not recognise the concept of senior loans directly, it is not prohibited to subordinate loans based on the general provisions of civil law regarding fulfilment of obligations and intercreditor agreements. Under Russian law, it is possible to provide in the loan agreement that any repayment of third-party loans shall be paid only after repayment of the loan provided under the loan agreement between the parties. In addition, the loan will be considered subordinated if the term of the loan repayment exceeds the term for repayment of other loans, or if the loan is unsecured while other loans are secured (for example, by pledges or mortgages).

For intercreditor agreements please refer to 4 Intercreditor Agreements, below.¬

Under Russian law, mezzanine loans are mostly provided by major Russian banks (for example, Sberbank through its investment company Sberbank CIB and Alpha Bank) or by investment funds (funds managed by New Russian Growth consulting company), since this kind of financing requires extensive expertise and may lead to excessive transaction costs. Taking into account that Russian law does not provide for flexibility in terms of subordination of loans and other terms of the transaction, usually mezzanine loans are granted under foreign law to the company established under the foreign law, which then finance the Russian company. Mezzanine loans are usually granted for a period up to five years at the interest rate not exceeding 20%.

As to PIK loans (loan agreements, under which principal debt and/or interest are repaid at the end of the repayment period), Russian law does not provide for any restrictions in this regard.

Bridge loans are frequently used in Russian business practice. Usually, such loans are provided by shareholders of the borrower, but provision of the bridge loan by the bank is also possible. 

In Russia, bonds are widely used to finance activity of its issuers. Mostly, bonds of Russian companies are issued and traded on the Moscow Stock Exchange, although it is possible to trade bonds without listing on the stock exchange (stocks traded privately). Russian law provides for the possibility not to register bonds issuance with the Central Bank of the Russian Federation (exchange bonds and commercial bonds), which makes this debt instrument flexible and cost-effective.

In Russian market practice there is no conventional approach to the identification of bonds as high-yield bonds. Some consider all bonds issued by companies not having investment grade rating from one of the internationally recognised rating agencies (Standard & Poor's Global Ratings, Fitch Ratings and Moody’s Investor Service) as high-yield (junk) bonds, while other believe that only bonds issued by small and middle-sized companies without any background are high-yield (junk) bonds.

Russian law provides for the possibility to place the bonds privately. Bonds, placed privately, can be either (i) classic corporate bonds, which shall be registered with the Central Bank of the Russian Federation, and (ii) commercial bonds, which are registered with the National Settlement Depository and cannot be traded on the stock exchange.

Russian law does not provide for the concept of loan notes. The instrument most comparable to loan notes in Russia is promissory notes. Under Russian law, a promissory note is a security, certifying the written monetary obligation of the issuer executed in a strictly established form that entitles its owner (bill holder) to receive the amount specified in it from the debtor (issuer) in a certain place. However, unlike the concept of loan notes in English law, promissory notes are in general negotiable instruments.

Russian legislation recognises the concept of an intercreditor agreement. Regulation of this legal institution was introduced into the Russian Civil Code in 2015; in 2018 the Syndicated Loan Law, regulating conclusion of syndicated loans and specifying certain aspects of intercreditor relations, entered into force.

The Russian Civil Code prescribes that an intercreditor agreement is entered into among creditors of a single debtor, having similar (homogeneous) claims to the debtor, pursuant to which the creditors agree on the order of their claim’s settlement, including priority of claims, disproportionate distribution of funds, received from the debtor, etc. In order that the debtor may assume some obligations under the intercreditor agreement, it shall be a party thereto as the provisions of the intercreditor agreement are not binding over third non-contracting parties.

Due to the recent introduction of intercreditor agreements’ regulation into Russian legislation and certain legislative gaps – for instance, the impossibility of applying intercreditor agreements’ provisions in the course of the debtor’s bankruptcy provisions – these agreements are not widely used in financial transactions in Russia.

Nevertheless, considering the switch to Russian law as the governing law for finance deals (as specified above), it may be assumed that the institution of intercreditor agreements will be further developed and elaborated by both legislation amendments and straightforward court practice, which will cause the subsequent use of this legal construction in Russian finance transactions.

The Federal Law “On the Securities Market” provides for special regulation of bond-holders meetings, which are entitled to decide on all important aspects in terms of relations with the issuer (for example, to waive the right to demand early repayment, to sue the issuer or security provider, to novate obligation to pay under the bonds). The meeting can be convened by a bond-holder (or pool of bond-holders) having more than 10% of the bond issuance.

There is no special regulation of bank deals with respect to intercreditor agreements.

Although Russian legislation does not restrict or prohibit participation of the hedge counterparty, which can be structured through intercreditor agreements or other legal Russian law instruments, in practice the accession of such party to a contract is not standard for Russian law-governed finance transactions.

Currently the most commonly used types of security in Russia are pledges of shares (both in limited liability companies and joint stock companies), movable assets (trucks, equipment, coal, grain, etc) and real property, bank accounts and receivables, as well as guarantees, issued by financial organisations and commercial companies, and suretyships, provided by commercial companies and individuals.

Pledge and Mortgage

Obligations of a company can be secured by a pledge of movable property owned by itself or by any third person. Under Russian law, if a debtor fails to perform its obligation towards a pledgee, a pledgee is entitled to receive preferential satisfaction from the value of the pledged property (or under certain conditions take possession of the property) before other creditors of the pledgor, subject to priority rules applied in case of a company’s liquidation or bankruptcy. The pledgee’s right originates from the moment of concluding the pledge agreement and with respect to the pledge of the property, subject to transfer to the pledgee – from the moment of transfer of this property, unless otherwise stipulated by the pledge agreement. Unless otherwise provided for by the pledge agreement, a pledge shall secure a claim in the amount of such claim at the moment of its satisfaction. A pledge would secure the principal amount of the underlying obligation as well as accrued interests (if any), penalties, compensation for losses caused by delayed performance and compensation for the pledgee’s necessary expenses relating to the maintenance and levy of execution on the object of pledge.

Pledges of movable assets are recorded in a register of notices of pledges of movable property, save for certain types of pledges registered elsewhere (ie, a pledge of shares, pledge of participatory interest and pledges of intellectual property, which are registered in shareholders’ registers, the unified state register of legal entities and intellectual property registers, respectively). Such registration is not required for a pledge to be valid, but is needed for the pledge to be effective against third parties. The register of notices of pledges of movable property is operated by the Federal Notary Chamber.

"Mortgage" means a pledge of immovable property such as land plots, buildings, mineral wealth and other assets closely connected with the land plot, aircrafts, sea-crafts, space vehicles and some other assets which may be specified as immovable property by the law. The essence of the mortgage is the same as the pledge, save for differences in levying execution and state registration of the mortgage. A mortgage is subject to state registration in the Unified State Register of Real Property (the USRRP) maintained by the Rosreestr, the Russian registration authority. A Russian company is entitled to provide mortgage security over its production equipment, factory buildings, office buildings, warehouses and other fixtures on the land (both completed and in-progress construction). Please note: the above-mentioned property shall be registered with Rosreestr as immovable property or construction in progress.


By virtue of an independent guarantee under Russian law, an independent guarantor shall, at the request of another person or entity (principal), give a written commitment to pay to the creditor of the principal (beneficiary) a definite cash amount in accordance with the terms of the guarantee upon the beneficiary's presentation of a written demand that such amount be paid. The requirement regarding specifying a definite cash amount shall be deemed satisfied if the terms of an independent guarantee enable one to establish the amount of money to be paid as of the time of performance of the obligation by the guarantor. The principal, who is the debtor under the primary (secured) obligation, must pay a fee to the guarantor for the issuance of an independent guarantee. Additionally, the bank issuing the guarantee would generally require cash collateral to be provided by the principal.

Independent guarantees may be issued by banks or other credit institutions (bank guarantees), as well as by other commercial organisations.

The independent guarantee may not be withdrawn or changed by the guarantor unless otherwise provided for by it.

The beneficiary under an independent guarantee is not entitled to transfer the rights of claim against the guarantor to another person, unless otherwise provided for by the guarantee.


In accordance with Russian legislation, the surety is obliged before the creditor to perform an obligation of a debtor in full or in part. The suretyship agreement may also be concluded to provide security for a monetary or non-monetary obligation, as well as for an obligation which will arise in the future.

In practice, a suretyship agreement is widely used as a security instrument because of its simple form and unconditional nature of liability of the surety. Both individuals and legal entities can be sureties. The current legislation does not provide any special restrictions on suretyship, including between the subjects of the group of companies. However, it should be noted that such suretyships, in cases fixed by Russian legislation, need to be approved by the corporate bodies of the sureties.¬

Russian legislation does not provide for mandatory templates of the above-mentioned security agreements, but it provides for certain requirements as to their form.

Pledge Agreements

Generally, the pledge agreement shall be executed in a simple written form save for special cases when the law provides for additional requirements to the form of the pledge agreement. For example, the agreement creating a pledge over the shares of a limited liability company is subject to obligatory notary certification and further state registration of created pledge with tax authorities in order to come into force. Moreover, a pledge over a company’s shares shall be reflected in the shareholders’ register (in joint-stock companies) or a list of shareholders (in LLCs), maintained by the authorised registrar (for joint-stock companies) or the general director (for LLCs).

Pledges of movable assets are recorded in a register of notices of pledges of movable property, save for certain types of pledges registered elsewhere (ie, a pledge of shares, pledge of participatory interest and pledges of intellectual property, which are registered in shareholders’ registers, the unified state register of legal entities and intellectual property registers, respectively). Such registration is not required for a pledge to be valid, but is needed for the pledge to be effective against third parties. The register of notices of pledges of movable property is operated by the Federal Notary Chamber.

Other types of pledge agreements (eg, pledge over shares in joint stock companies, moveable assets, real property or receivables) are not subject to mandatory notarisation. However, the parties may agree to notarially certify the respective document, among other issues, in case they choose out-of-court procedures of enforcement over the pledged assets.

Guarantee and Suretyship

An independent guarantee must be made in written form, in order to accurately define the guarantee’s conditions and verify the validity of its issuance. Russian law specifies a list of obligatory elements, which shall be included in a document in order that it may be regarded as a guarantee – for example: date of issuance; principal; beneficiary; guarantor; principal obligation which execution is secured by the guarantee; monetary sum to be paid or procedure for its calculation; guarantee's duration; and circumstances upon which occurrence the guarantee's amount has to be paid. However, the independent guarantee shall not be void if not done in writing, provided that the beneficiary (ie, the creditor under the primary obligation) is able to present to the court written documents and other evidence of the existence of the independent guarantee, excluding witness testimony.

Regarding a suretyship agreement, it shall also be made in written form. Terms and conditions to be set therein shall be similar to the ones specified in the guarantees, as the legislation does not provide for such a formal approach to consider a document as a suretyship agreement.

The Russian law prescribes that suretyship agreements or guarantees are not subject to any mandatory notarisation, registration and/or filing procedure. However, if a creditor wants to have an option of recovery of indebtedness by means of notary executory endorsement, suretyship agreement or guarantee shall be notarised.

Russian law does not provide for restrictions on the provision of upstream security in course of acquisition finance deals.

Russian law does not specify any provisions on prohibition of financial assistance, as certain requirements (restrictions) exist – for instance, compliance with the thin capitalisation and transfer pricing rules; please see 9.3 Thin Capitalisation Rules, below.

Russian legislation does not set any special restrictions as to provision of security (for example, corporate benefit concept), but it provides that certain transactions, including conclusion of pledge agreements, issuance of guarantees and provision of suretyship, may be subject to the internal authorisations of contracting parties – ie, such transactions shall be approved by a company’s authorised bodies (general meeting of shareholders or board of directors) as major and/or interested party transactions or otherwise, if prescribed by the company’s constituent documents and internal regulations.

Pledge (Mortgage) Agreement

Generally, enforcement of a security is possible only upon occurrence of an event of default. Russian legislation prescribes that courts may refuse to enforce a creditor's claims if the default was not significant (for example, in case of a pledge, the sum of unpaid debt is less than 5% of the pledged assets or the period of the delay in performance of secured obligations is less than three months). Therefore, it is important for the pledgee to consider the significance of the event of default before enforcement of security.

The parties may agree on an out-of-court enforcement, except for certain cases when out-of-court enforcement is not allowed (eg, for historical or art items). The Russian law prescribes that parties may agree on one or several out-of-court enforcement methods, for example: sales (including public sales); assuming the ownership on the pledged property by the pledgee; sale of the pledged property to a third party (direct sale without holding of public sales/auction).

In case of assuming the ownership on pledged property by a pledgee, a pledgee can acquire the pledged asset (as noted above, if so agreed), but that does not happen automatically upon default. Russian law does not allow the creditor to simply take control over the pledged asset without formally completing one of the available enforcement procedures. In addition, if the pledged or mortgaged property is realised via an auction (court or out-of-court) the pledgee can acquire the pledged/mortgaged property under certain conditions if the auction fails.


In case of non-performance or undue performance by the debtor of the obligation secured by the suretyship, the surety and the debtor shall be jointly responsible to the creditor, unless the surety's subsidiary liability is stipulated by the law or by the contract of suretyship.

The surety shall be responsible to the creditor in the same volume as the debtor, including the payment of interest, the compensation of the court expenses for levying the debt and other losses, borne by the creditor, caused by the debtor's non-performance or undue performance of the obligation, unless otherwise stipulated by the contract of suretyship.


Enforcement of an independent guarantee differs from enforcement of other securities. The commitment of the guarantor towards the beneficiary does not depend upon the principal (secured) obligation secured by the relevant independent guarantee or upon the relations between the principal and the guarantor as well as upon any other obligations even if they are expressly specified in the independent guarantee. This means that the guarantor may not refuse payment under the guarantee based on any defences arising from the relations between the beneficiary and the principal or based on the invalidity of the principal obligation secured by the independent guarantee, and is obligated to pay to the beneficiary upon presentation by the latter of a written demand and documents required under the independent guarantee. The beneficiary shall point out, either in the claim itself or in the attachment, the circumstances which occurrence shall entail payment under the independent guarantee.

The guarantor is entitled to suspend payment under the guarantee for a term up to seven days if it has reasonable grounds to believe that: any of the documents presented thereto is unreliable; the circumstance in the event of which occurrence the independent guarantee would secure the beneficiary's interests has not occurred; the principal obligation of the principal secured by the independent guarantee is invalid; execution under the principal obligation of the principal has been accepted by the beneficiary without any objections.

In the event of the payment's suspension, the guarantor is bound to immediately notify the beneficiary and the principal about the reasons for and time of the payment's suspension.

The guarantor may only refuse to fulfil its payment obligation under the guarantee if the claim for payment and provided documents are inconsistent with the requirements of the independent guarantee itself or if the term for the presentation of such claim established in the guarantee has already expired. The guarantor shall notify the beneficiary of its refusal and specify the reason of the refusal.

Generally, there are two types of guarantees, which are commonly used in acquisition finance: (i) a guarantee, issued by a bank (bank guarantee), and (ii) a guarantee, issued by any commercial company (independent guarantee). These guarantees may be used as upstream, downstream and cross-stream security.

Russian legislation does not set any special restrictions as to provision of security (for example, the concept of corporate benefit), but it provides that certain transactions, including conclusion of pledge agreements, issuance of guarantees and provision of suretyship, may be subject to internal authorisations of contracting parties – ie, such transactions shall be approved by a company’s authorised bodies (general meeting of shareholders or board of directors) as major and/or interested party transactions or, otherwise, if prescribed by the company’s constituent documents and internal regulations.

Based on practice, inclusion of a fee payment requirement clause in a guarantee depends on the type of the guarantor. Thus, usually banking guarantees set the requirement of a fee payment for their issuance. While it is not prohibited by law to prescribe a fee in an independent guarantee to be paid in favour of a commercial company, in practice it is less commonly used because, as a rule, independent guarantees are often issued by intergroup companies, which are not aiming for profit but for the accomplishment of complex transactions

Federal Law “On insolvency (bankruptcy)” No 127-FZ, dated 26 October 2002 (the Insolvency Law), stipulates that current claims have priority over all other claims and are satisfied in the following order of priority:

  • court fees incurred in connection with the insolvency proceedings and the fees of any administrator and any agents engaged by the administrator in the course of the insolvency proceedings, where their engagement was required by law;
  • wages and salaries of the debtor’s employees and former employees;
  • fees of the administrator’s agents which do not fall within the first category;
  • current public utilities and operational expenses of the debtor; and
  • other current claims.

After satisfaction of claims in the above categories, all other claims are ranked in the following order of priority:

  • first rank claims – personal injury claims;
  • second rank – wages, salaries and copyright payments; and
  • third rank – all other claims.

Tax or other governmental claims rank equally with third-priority claims. Claims secured by a pledge (mortgage) are satisfied in priority to all other claims in relation to up to 70% (or 80% in the case of secured claims arising under loan agreements) of the proceeds of the sale of such secured assets at a public auction.

Concerning the equitable subordination rules, in Russia there are two groups of claims, which may be included in the register of creditors' claims and will be subordinated to the last order of priority.

The first type of claims are claims of affiliated creditors of the debtor. It should be mentioned that such claims are not automatically included into the register of creditors' claims, and the court decides on their inclusion on a case-by-case basis; currently, the general approach is not to include such claims in the register (in cases, for example, when such claims are of bad faith nature). This legal concept has been developing by the Russian Supreme Court since 2016.

The second type of claims that may be subordinated are claims on challenging of a transaction, if at the moment of its conclusion bad faith of a party existed (for instance, knowledge of the future bankruptcy of the debtor). For this purpose respective transactions may be challenged based on only two grounds: (i) as an unduly preferential transaction, or (ii) a transaction, performed against the creditors’ interests. This type of subordination is based on the provisions of the Insolvency Law on challenging transactions in the course of bankruptcy proceedings.

The Insolvency Law sets the general rule, which is applicable to all types of market transactions, including acquisition finance deals. It provides that external and liquidation managers are empowered to investigate the debtor’s past and current transactions to assess if any of them have been undervalued or unduly preferential. Those that are found to have been so can be challenged by the Arbitrazh court (ie, one of the Russian state commercial courts). In particular, transactions which entail the preferential treatment of one creditor over another can be invalidated at the request of the bankruptcy manager acting on its own initiative or at the request of the creditors.

Transactions where one creditor has benefited from preferential treatment at the expense of another must have been completed within one month before, or at any time after, the date on which the insolvency filing became effective in order for them to be set aside; in exceptional circumstances the applicable hardening period (ie, the period during which the transaction is vulnerable to challenge) may be extended to six months.

Furthermore, specific hardening periods of one and three years are applicable to transactions at an undervalue and any transactions which were entered with the intention of damaging the interests of other creditors.

The Russian law does not provide directly for debt buy-back – however, this instrument does not contradict any mandatory provisions and can be applied based on general provisions of the Russian Civil Code.

There are no stamp or similar taxes in Russia.

Repayment of the principal amount of loan to the foreign lender is not taxable in Russia – ie, no VAT or withholding tax (WHT) applies to the principal amount of loan. Payment of interest is not subject to VAT, but is taxed at the source of income in Russia at the general WHT rate of 20%, if otherwise is not stated by the Double Taxation Treaty (DTT).

The DTT may provide for the reduced rates or an exemption of the WHT in Russia. In order to apply these beneficial provisions the foreign lender should document and confirm its status as a beneficial owner of income (BO) and provide a tax residency certificate for the respective tax period prior to the payment of interest.

If such confirmations are not provided or the lender is not the BO, the Russian borrower would not be able to apply the beneficial provisions of the DTT. As combating tax base erosion and the application of anti-abuse provisions is currently one of the hottest issues in Russia, confirmation of the BO’s status and application of the DTTs’ beneficial provisions are subject to the special control of the tax authorities.

Russian tax law provides the general anti-avoidance rules including the thin capitalisation and transfer pricing rules. Certain other rules and guidelines related to the intragroup loans may also be found in the judicial practice.

Thin Capitalisation Rules

Thin capitalisation rules apply to the foreign controlled debts – in other words, if the loan was provided by the foreign parent company to its Russian subsidiary and the foreign parent company directly or indirectly owns more than 25% of the Russian subsidiary’s share capital.

If the loan is recognised as a controlled debt, the Russian company may face the following restrictions and requirements. The deductibility of interest may be restricted to the extent that the cumulative controlled debt exceeds the net assets of the Russian company by more than three times, or 12.5 times for banks and leasing companies. Interest on excess debt is non-deductible and treated as dividends taxable at other WHT rates than interest payments.

Transfer Pricing Rules

Starting from 2019, transactions between the related parties are recognised as controlled transactions subject to the Russian transfer pricing rules if the total amount of income from such transactions for the corresponding calendar year exceeds RUB60 million (approximately EUR830,000).

If the loan is considered as a controlled transaction, the Russian borrower may account the interest as expenses for profit tax purposes in case the interest rate corresponds to the limits established by the Russian tax law. For example, for the loan provided in euros the interest rate under the loan agreement should not exceed the EURIBOR rate plus 7%.

Other Issues

Pursuant to the current judicial practice, the tax authorities can refuse to allow a Russian company to deduct the amount of incurred interest for the profit tax purposes in the following cases:

  • requalification of the loan agreement into the investment agreement – if the debtor (Russian company) does not repay the loan and incurred interest to the lender (foreign company), the loan was initially structured in accordance with the arm’s-length basis and standard market practice, the terms of the loan agreements are prolonged repetitively, the tax authorities may consider such loan as an investment to the Russian subsidiary resulting in various tax risks for the Russian company.
  • debt push-down – certain foreign companies use a strategy when the buyer raises the debt financing, acquires the target Russian company and then merges with it, which allows it to “push down” the debt obligations to the level of the target Russian company.

Based on recent judicial practice, such strategy is quite risky, as the tax authorities may consider such restructuring unreasonable and refuse to allow the target company to deduct expenses related to the debt obligations.

Russian law does not provide for any concepts similar to the concept of certain funds requirements established by the UK's City Code on Takeovers and Mergers. However, in case of an auction sale, obligations and commitment of the bidders may be secured by independent guarantees and/or deposits. In addition, the organiser of a private auction may establish additional requirements for potential bidders.

Please see 10.1 Regulated Targets, above.

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ALRUD Law Firm was established in 1991 by senior partners Maxim Alekseyev and Vassily Rudomino, and is widely recognised as one of the leading Russian law firms. The team extends to some 100 professionals, led by ten equity partners, who bring expertise and experience across the full range of legal services. ALRUD's banking and finance team has profound expertise in all kinds of financial and capital markets transactions, both domestic and cross-border; the team's considerable experience includes advising banks and financial institutions, as well as corporates, in various types of transactions. ALRUD's clients include blue-chip multinationals, privately owned companies and Russian state-owned enterprises; outside of the Russian domestic market, the firm's clients are spread across the UK, Europe, Asia, North and South America.

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