Banking & Finance 2020

Last Updated October 05, 2020


Law and Practice


Clifford Chance has had an established presence in Russia since 1991. Its Moscow office operates as a fully integrated part of the firm’s international network and provides a full service in each area of interest in the commercial sector, including banking and finance, corporate and M&A, capital markets, litigation and dispute resolution, real estate and tax, pensions and employment. The Russian banking and finance practice is well balanced between borrower and lender mandates, enabling the firm to offer constructive advice in the following areas: secured and unsecured bilateral and syndicated loans, leveraged and acquisition finance, asset finance and debt restructuring in Russia and the wider CIS region. Clients include borrowers, arrangers, lenders, debt and equity financiers, project sponsors, ECAs and international financial organisations. The firm advises clients on the full range of banking transactions across all sectors, including petrochemicals, power, metals, and mining, oil and gas, water, transportation (aircraft, rail, automobile) and telecommunications.

Over the past few years, the Russian economy has faced a recession in the second half 2014-15, almost zero GDP growth in 2016 and modest growth in 2017 (1.8%), 2018 (2.5%) and 2019 (1.3%) (World Bank), all followed by a primarily COVID-19 driven negative growth forecast of 4.5% in 2020 (EBRD). The main factors affecting economic performance in the short to medium term are macroeconomic, particularly oil price, and geopolitical.

Since 2014, the countryhas suffered the combined impact of Western sanctions and a sharp fall in the price of oil. Brent Crude went from over USD100 per barrel throughout 2014 to USD53 in January 2015 and reduced further to USD35 in January 2016. Between 2017-19 there seems to have been some growth in oil prices, but the low demand driven by COVID-19 and the interruption of the OPEC agreement resulted in oil prices being as low as USD20 in April of this yearbefore balancing back to the average of USD42.3 in the summer (Trading Economics).

The above resulted in the high volatility of the Russian rouble from RUB56/USD1 in February 2018 to RUB80/USD1 in March 2020. However, the continuing monetary measures of the Russian Central Bank, including decrease of the key (refinancing) rate, have brought inflation down to as much as below 4% in 2020 with a forecast of less than 3.5% in 2021.

Post-COVID-19 Recovery

Although the government is conservatively predicting a post-COVID-19 growth of 3.2% in 2021 and 2.9% in 2022, this recovery remains fragile with consumer confidence being at its lowest levels for many years as the effects of modest growth take their time to filter through to the wider economy. The Central Bank is unlikely to be too concerned about this in the short-term, on the basis that this may help to head off inflationary pressures as the currency stabilises, allowing forecasting to become more predictable and facilitating the return of purchasing power. Unemployment has grown during COVID-19 restrictive measures from 5.8% in April 2020 to 6.3% in July 2020, currently representing the highest unemployment rates since 2012. Real incomes have also continued to fall.

Continuing sanctions pressure significantly limits the role of foreign banks on the Russian market, and the confidence of foreign investors had been largely affected by adding Mr Deripaska to the list of SDNs in April 2018 alongside business controlled by him, including aluminum giant Rusal which produces over 6% of the world's primary aluminum. Although the sanctions against Rusal were lifted in January 2019, foreign banks became much more focused on the risk assessment when lending to Russia, including considerations around secondary sanctions and associated risks.

International Financing

However, there are still areas of Russian economy which enjoy traditional bank lending from foreign banks, both on bilateral and syndicated levels.

The predicted turn towards China has materialised to some extent with, to quote some high-profile cases, Chinese banks' lending to finance the Yamal LNG project, and in September 2016 Russia’s State Development Bank (VEB) signing a CNY10 billion (USD1.5 billion) loan with syndicate of Chinese banks. Furthermore, Novatek's Arxtic LNG 2 project is being largely financed by European and Asian banks, so is Nord Stream 2.

It seems likely, however, that Russian borrowers would naturally return to Western banks with which they have established connections if they were able to do so. An example of this is USD4,150 million facility extended to Norilsk Nickel by a syndicate of European, American and Asian banks in February 2020.

The fast-moving trend of ESG financing has reached Russia with a few deals being closed in 2019, including Societe Generale financing two leading Russian gold companies Polymetal and Polyus Gold and Rusal securing a sustainability-linked financing from a syndicate of foreign and Russian banks to partially repay its existing pre-export finance.

One consequence of the Western sanctions and the shortage of international financing is the growing demand on the domestic syndicated market for both project finance and corporate lending. While its development started a few years ago, before any sanctions were introduced and a standard Russian law syndicated loan agreement was presented to the market in 2015, a special Law on syndicated lending came into force in 2018, thus providing a new legal framework to support continuing growth and development of Russian law governed syndicated lending.

Obviously, COVID-19 had a negative impact on the normal course of corporate lending activity with little new money being lent and some deals being cancelled or put on hold. The impact was even more noticeable on the side of foreign banks' lending to Russia, including due to such banks playing an important part of supporting their own economies and also Russian borrowers taking a pause in considering new deals in anticipation of continuing unpredictability of their cash position and cash demands.

At the same time both, the banks and the borrowers faced an urgent need to respond to the challenges brought by COVID-19 and the restrictive lockdown measures introduced in Russia.

As part of the Government support programme, businesses affected by COVID-19 were entitled to apply to a number of state-owned banks for emergency loans to cover urgent cash needs (including to pay salaries during lockdown). Such loans were provided on a temporary, interest-free basis with dynamic subsequent interest rates depending on the unemployment rate of the relevant entity following the COVID-19 measures.

However, a lot of deals progressed forward and were successfully closed. COVID-19 resulted in some market participants to deviate from their standard procedures and be rather innovative in developing electronic signing and alternative to offline ways of meeting and negotiating deals.

Sector-Specific Responses

The real estate sector (especially non-food retail, shopping and entertainment centres, but also business centre owners) had to approach their creditors for principal and interest deferrals due to the cash leakage caused by the tenants asking for the rent holidays or failing to perform their obligations under the lease agreement.

Some export-oriented businesses suffered lower commodity prices, thus facing breach or anticipated breach of financial covenants and working with their lenders on covenant holidays or repricing the loans in exchange of easing the burden of financial covenants testing.

Few loans which performance is dependent on share market value had margin call events due to the high volatility on the stock markets. Again, this resulted in either covenant holidays on an agreement on providing additional collateral to cover pricing gaps.

There is no high-yield market in Russia and has never been. The primary reason is that it would be very unusual for the Russian companies who could potentially benefit from such an instrument to go to the market for borrowing. Taking into account the current market conditions, the development of any such market is not expected any time soon.

There is no significant growth in alternative credit providers in Russia. The transactions on the market are usually documented under the standard LMA documents using off-shore entities for structuring purposes in case a facility is provided by Russian banks(s) or under Russian standard documentation for syndicated lending in case of a pure domestic deal.

However, there are players on the market which can be, to a certain extent, named as alternative credit providers. This includes special state-owned funds (eg, Far East and Arctic Development Fund) which have been established to support the development and economic growth of particular regions. Such funds lend at lower subsidised rates in roubles to the projects which meet certain eligibility criteria and needs of a particular region (ie, infrastructure development, agricultural projects, etc).

Some major banks also have investment sub-divisions which provide mezzanine financing alongside senior debt of their parent bank to achieve additional premium for the group, equity premiums, etc.

A significant part of lending transactions continue to be governed by English law in accordance with standard LMA approach. The major problems with this approach are the tendency to "deoffshorisation" and the requirement to have a foreign element in the structure (eg, an off-shore borrower or lender). As a result, significant steps were taken to encourage development of the Russian syndication market.

A new standardised document governed by Russian law was presented in 2015 during an LMA conference in Moscow and on 1 February 2018 Law On Syndicated Loan came into force. While syndicated loans under Russian law were done before the Law on Syndicated Loan, the Law became the first Russian legal act ever regulating Russian law governed syndicated loans.

Domestic syndicated loan market can be illustratively divided into five areas:

  • project finance fabric – project finance club deals which are normally led by VEB.RF as a state corporation responsible for the development of project finance and where VEB.RF acts as facility agent and the syndicate would also include one or two major Russian banks (Sberbank, VTB, Gazprombank);
  • syndicated secured major club deals put together by two to four major Russian banks;
  • unsecured and sometime guaranteed syndicated facilities arranged by Russian subsidiaries of foreign banks, including subsidiaries of European and Chinese banks;
  • restructurings where bilateral deals are either refinance or repackaged into syndicated loans; and
  • bilateral loans provided by major Russian banks with incorporate syndicated provisions to ease partial syndication post drawdown.

Other than the Law on Syndicated Loan mentioned above there have been no major legislative changes affecting the syndicated loan market over the last couple of years.

Various significant changes were made back in 2014-16, some of which are listed below.


On the tax side, the "deoffshorisation law" has introduced the concept of "beneficial ownership" and of a "controlled foreign company" (CFC) into Russian tax legislation (ie, Russian residents are obliged to disclose foreign entities that they control). The introduction of the concept of beneficial ownership has made cross-border conduit structures, including those with back-to-back lending, rather risky. Further, starting from 2017, together with standard tax residency certificates, foreign recipients of income are required to provide their respective Russian payers confirmations of their "beneficial entitlement" to income (the law provides for no form or format of such confirmation).

As for the CFC concept, if the borrowers make the required disclosures, this may impact the way Russian banks would need to calculate their large exposures and create provisions (as currently the borrowers' group structures may not necessarily be completely transparent for the regulators or authorities and the banks may currently have less strict approaches to defining the borrower's group).


Another important change relates to relaxation of interest deductibility rules and thin capitalisation rules in respect of foreign currency loans, which was made to mitigate the impact of the significant increase of the base rate by the Central Bank and significant depreciation of Rouble at the end of 2014. Russian thin capitalisation rules were also significantly amended to combat "sister company" financing schemes and are now based on affiliation criteria according to Russian transfer pricing rules. The new thin capitalisation rules also envisage conditional exemptions for intra-group financing, certain guaranteed third-party bank loans (including loans provided by foreign banks), and Eurobond structures.

Russian Civil Code

Significant amendments were also made to the Russian Civil Code, the majority of which were aimed to develop the Russian syndication market. The amendments introduced some new concepts to the Russian law such as the security manager, pledge of accounts, the independent guarantee, representations and many others. These concepts are now actively used in international and domestic lending transactions accompanied by the development of court practice in the same areas.

It is not necessary under Russian law for a legal entity, other than a bank incorporated under the laws of Russia, to be licensed, authorised or otherwise entitled to carry on business in Russia in order to enable such legal entity to provide financing or to enforce its rights under such financing.

Foreign lenders are not restricted under Russian law. Current restrictions relate to the EU and US sanctions.

This is not applicable under Russian law.

The existing currency control rules do not restrict provision and repayment of loans and granting of security or guarantee in foreign currency. Certain formalities need to be satisfied by the Russian entities such as maintaining of records of a loan from a foreign lender with Russian authorised banks.

As a general rule, a loan to a Russian corporate should be advanced, in full, to its account with the Russian authorised bank servicing the loan (ie, where the records of a facility agreement are maintained) and it is not possible, for example, for the creditor's fees and costs to be deducted from the loan advance or for the loan to be advanced directly to a third-party bank for the purpose of refinancing an existing loan. It is possible, however, to credit a loan with a tenor exceeding two years to an account of the Russian borrower with an account bank resident in a member country of EAEU (Eurasian Economic Union) or in a foreign state which exercises the automatic exchange of financial information with Russia, if the loan is made by a lender located in a member country of EAEU or in a foreign state which exercises the automatic exchange of financial information with Russia or is an agent of a foreign state's government. This is also subject to the requirements to keep the records in relation to the loan with a Russian authorised bank.

There is also a general foreign currency proceeds repatriation rule (with some exemptions related to servicing loans with maturity over two years from lenders – residents in a member country of EAEU (Eurasian Economic Union) or in a foreign state which exercises the automatic exchange of financial information with Russia) which requires all export proceeds in foreign currencies to be credited to the accounts of exporters in Russian authorised banks.

Not under Russian law as such. There may be certain limitations deriving from special state programmes or in case interest rate under the loan is subsidised. Normally, the restrictions on the use of proceeds are introduced in the documentation itself, failure to comply with such will result in a default.

Russian law recognises the agent concept but does not recognise the trust concept. All payments by borrowers and guarantors under foreign law documents usually are made through the agent and Russian courts would give effect to the choice of English law to govern the agency provisions in the finance documents.

The Law on Syndicated Loan also introduced the role of "facility manager" for Russian law governed syndicated loans whose role, similarly to a facility agent in LMA standard document, to administer payments and certain other matters under the facility agreement.

To replace the trust concept for the purpose of taking security, two structures are predominantly used in case a facility agreement is English law governed:

  • the "parallel debt" structure whereby the security is granted to secure a covenant to pay given in favour of the security agent; and
  • the "joint and several creditors" structure whereby the security is granted in favour of the security agent to secure its right under the finance documents in each case jointly with each of the other creditors.

The security agent will, upon enforcement, share the security proceeds among the lenders.

For Russian law deals the pledge manager concept introduced in the Russian Civil Code is used since 2014. The pledge manager enters into pledge agreements and manages security on behalf of all lenders, however all lenders are legally secured creditors/pledgees under the respective pledge agreements.

The loans governed by English law are usually transferred by way of novation or assignment and transfer agreement governed by English law. Novation is not usually used for the transfer of secured deals which do not contain parallel debt or joint and several creditor structure, as there is a risk that upon termination of the existing loan (which is the case with the novation mechanism) the Russian security may terminate. However, in case the security is solely in favour of the security agent on the basis of parallel debt or joint and several arrangements, individual lenders (other than the joint and several creditor) should be able to transfer their shares in the facility without any impact on the security.

The loans governed by Russian law are transferred by way of assignment governed by Russian law. The form of an assignment agreement is normally attached to the syndicated facility agreement and regulates new lender acceding not only to borrower/lender relationships but also to the contractual arrangements with the facility manager and pledge manager.

Generally, when a secured loan is transferred the Russian law security package is transferred automatically as Russian security is accessory in its nature. However, it is good practice to amend the security package following such transfer to reflect the new lender as the secured party unless the security is provided to the security agent, and such security agent remains in place. Such amendments make the enforcement process easier.

There is no limitation under Russian law related to buy-back of debt by the borrower or the sponsor. This is always subject to commercial negotiations.

Russian law does not have any concepts similar to the "certain funds" requirement.       

Withholding tax is applicable in the case of foreign lenders. The standard rate is 20%. The relevant double tax treaty may reduce the tax rate in certain cases to 0%.

There are no other taxes, duties or tax considerations which are relevant to lenders making loans to entities incorporated in Russia. The lenders need to be aware of the notarial fees payable upon entering into the Russian security documents (which vary depending on the type of security and the means of enforcement, ie, through court or out-of-court enforcement). There are other minor state registration charges for taking security over certain types of property, eg, immovable property.

Generally, there are no rules limiting the amount of interest that can be charged by the lenders.

In certain cases, eg, where the loan is provided or security for the loan is granted by related parties not all interest may be deductible by the borrower for the profit tax purpose or the payment of interest may be recharacterised into dividends with the relevant reduction of withholding on the interest ceasing to be applicable.

If the amount of interest is not arm's length, the lenders may not be able to benefit from the protection provided under the relevant double tax treaty (this would depend on the wording of a particular tax treaty).

There are two main types of Russian assets security available to lenders:

  • pledge of movable assets (including shares, commodities, contractual rights and bank accounts); and
  • mortgage over immovable assets (including land plots, buildings and land lease rights).

In order to create a valid security interest, a pledge of shares in Russian joint stock companies must be registered with the relevant register of shares/custody where the shares are held; a pledge of participatory interest in a limited liability company must be notarised and registered with the Unified Register of Legal Entities, and a mortgage over immovable assets must be registered with the local land register. Special rules need to be complied with for the perfection of the security created over assets subject to registration (eg, vessels of aircrafts).

There is also a unified register of notices of pledge maintained by notaries where security over movables is registered on a property by property basis (other than the security which is subject to mandatory registration described above). Such registration is not necessary for the validity or enforceability of the relevant security interest. It is aimed to establish its priority and serves as a notice to third parties that the security interest over a particular property was created. Without such registration, the pledge will terminate if the property subject to pledge is sold to a third party.

Generally, in order to be able to benefit an out-of-court enforcement procedure (if provided for in a pledge/mortgage agreement), such pledge/mortgage agreement needs to be notarised. Any security documents can be created within a few weeks and the only substantial costs are notary fees which are limited by law (using the current exchange rate approximately up to USD7,000 for a pledge agreement other than a pledge of participatory interest).

It is not possible to take a floating charge over the assets of a Russian company because a floating charge is not recognised in Russia. Russian law allows a mortgage over an enterprise (including all tangible and intangible assets unless excluded by agreement), but it is not used in syndicated lending since it requires, among other things:

  • a complete inventory of the enterprise's assets;
  • the value of secured obligations to be not less than half of the value of the enterprise; and
  • the mortgage to secure obligations that are due at least one year after the date of the mortgage.

This type of mortgage may only be enforced through the court.

To achieve a structure that is close to a floating charge over, a combination of different forms of pledges and mortgages is used (eg, mortgage over land rights and buildings, pledge over shares or a participatory interest, pledge of rights to receivables, pledge of inventory, etc).

It is generally possible to give downstream, upstream and cross-stream guarantees. It is advisable that all appropriate corporate approvals are to be in place prior to entering into such guarantees.

There is no concept of financial assistance under Russian law.

There are no specific restrictions. The state legal entities are subject to the limitations which are included in the world bank negative pledge provisions.

The lenders (security agents) and the relevant security providers have to sign the release agreement and, where relevant, file it with the registration authorities. The security provider has a statutory right to demand from the security holder to perform all necessary actions to deregister the pledge interest upon its termination.

As Russian security is accessory in nature, it terminates once the secured obligation is repaid in full.

It is possible under Russian law to secure the claims of different creditors by a single asset. In this case, the pledges would rank in priority according to:

  • their order of creation (which in the case of a registered security interest will be the date the security is registered with the relevant registers); and
  • in the case of a pledge over movable assets, the date of making an entry of the pledge in the unified register of notices of pledges maintained by notaries.

The priority may also be contractually varied.

Russian law has also recently introduced the concept of contractual subordination of claims. However, in the absence of any corresponding changes to the bankruptcy legislation any contractual subordination provision in respect of a claim against an insolvent Russian company is unlikely to be effective.

A secured creditor may enforce its collateral when there is an amount due and unpaid under the relevant obligation unless the enforcement is subject to other conditions established in the relevant security documents. The enforcement of a pledge/mortgage is prohibited if the breach of the secured obligations is insignificant and the size of the claim clearly does not correspond to the value of the secured property. A pledge/mortgage may not be enforced if:

  • the amount of the payment in default is less than 5% of the value of the secured property; and
  • such default continues for less than three months.

The security must be enforced through the courts, but the parties may agree in the security documents on an out-of-court enforcement, subject to certain limitations provided by law when enforcement is available only through the courts (eg, where under the initial and subsequent pledges over the same assets different methods of enforcement or enforcement realisation apply; or the assets are secured in favour of a few secured creditors with respect to different secured obligations and no unified procedure for enforcement has been agreed). The parties to the pledge/mortgage agreement may agree the method of sale of the secured property in the case of court enforcement from the list of methods available under out-of-court enforcement.

Out-of-Court Enforcement

With an out-of-court enforcement, the assets may be:

  • sold at an open auction arranged by a specialised organisation;
  • sold directly by the secured creditor to a third party without an auction; or
  • appropriated by the secured creditor.

Enforcement regimes may be different for different types of assets (eg, bank accounts, receivables, immovable assets, public shares or mortgage over an enterprise).

For the majority types of pledges and mortgages any methods of out-of-court realisation would be successful only if the security provider is co-operative enough or, failing that by obtaining a notary's executory endorsement (available only if the mortgage agreement is notarised).

The security over Russian assets is usually governed by Russian law. Having said this, in any proceedings taken in the Russian Federation for the enforcement of the obligations of Russian debtors or security providers under any finance or security documents, Russian courts usually give effect to the choice of the laws of a jurisdiction other than Russia to govern the relevant document.

The submission to the jurisdiction of the courts of a jurisdiction other than Russia by the Russian parties contained in the relevant finance or security document would generally be recognised by the courts of Russia as legal and valid.

In any proceedings taken in the Russian Federation for the enforcement of a valid arbitral award granted against the Russian company in connection with the enforcement under the finance documents, the courts of the Russian Federation would recognise and enforce such arbitral award in accordance with, and subject to, the provisions of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the civil procedure legislation of the Russian Federation and the relevant provisions of the International Commercial Arbitration Law.

In practice, reliance upon international treaties and the International Commercial Arbitration Law may be met 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 such arbitral award in the Russian Federation.

A Russian court will not recognise and enforce a foreign arbitral award in certain cases without examining the merits of a case, including in instances where it considers the execution of such award (or the matters adjudicated on therein) to be contrary to Russian public policy.

Russia has concluded treaties for the mutual recognition and enforcement of court judgments with very few countries (generally, the CIS (Commonwealth of Independent States) countries and certain others such as Cyprus, Spain and Poland). There are few court decisions on the enforcement of foreign court judgments on the basis of a combination of reciprocity and the existence of a number of bilateral and multilateral international treaties, but the risks of non-recognition remain.

Russia, as successor to the Soviet Union, is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. It was therefore usual practice for the parties to a loan agreement governed by a foreign law to agree to arbitrate disputes before a foreign arbitral tribunal, often with an option for the lender to submit a particular dispute at its discretion to a foreign court before arbitral proceedings are commenced. This unilateral right gave them an opportunity of quick enforcement against the assets of the Security Provider located off-shore. Until 2012, Russian courts recognised the validity of such unilateral optional dispute resolution clause of English law finance documents.

However, in 2012 the former Supreme Arbitrazh Court overturned the existing court practice and concluded that an agreement where only one party is granted the right of recourse to a competent Russian state court and which deprives the other party of similar rights to submit to state courts is not effective as violating the principle of equality of procedural rights and the balance of interests of the parties. Accordingly, a party unilaterally deprived of the right to go to state courts will nevertheless have the right of recourse to a Russian competent court to consider its dispute (ie, a unilateral option of one party to choose between international arbitration and state courts was converted into bilateral). The arbitration agreement subject to such lender's unilateral option to submit to state courts should not be deemed invalid. In most (but not all) transactions the Lenders choose the submission only to arbitration panels and avoid the alternative unilateral option to submit to state courts.

There is no regulated developed pre-insolvency procedure under Russian insolvency law. The only measure which is mentioned in the insolvency legislation is rehabilitation by way of provision of financial assistance by the shareholders/creditors in an amount sufficient to satisfy the payment obligations of the company to prevent its bankruptcy and restore its solvency. It is not mandatory to use this proceeding before the commencement of the insolvency procedure and in practice it is rarely used.

It has recently become common practice to enter into a standstill agreement among the creditors to avoid the insolvency proceedings. If the creditors are foreign entities such standstill agreement would usually be governed by English law. It is not clear to what extent the standard standstill provisions are enforceable as a matter of Russian law without amending each loan agreement subject to the standstill.

The recent amendments to the Civil Code introduced the concept of a waiver on the exercise of a right within a set period of time. Until it is tested in practice and in courts it is difficult to predict whether the use of this concept in practice may amount to the fully fledged standstill agreement under which a party may be effectively bound by the waiver of its right:

  • to enforce its claim and security; and
  • to file for the company's bankruptcy.

A lender would be allowed to enforce its loan or any security once insolvency proceedings are commenced only in accordance with the rules set out in the insolvency legislation. Guarantees shall not be affected by the insolvency of the borrower and if the guarantor makes a payment under the guarantee, it would replace the relevant creditor to the extent of such payment.

In an insolvency, the pledged and mortgaged assets are segregated from other assets and prior to the liquidation stage of insolvency may be sold by the insolvency court (through auction) provided that the debtor does not contest such sale as preventing to restore the debtor's ability to pay its debt in general. During the liquidation stage (where all creditors' claims are subject to satisfaction), the debtor would not be able to contest the sale for the same reason.

Enforcement proceeds from the sale of the secured property are applied against the secured debt of the respective secured creditor. Claims of secured creditors are treated as claims of unsecured creditors to the extent they are not discharged out of the relevant enforcement procedure.

Upon realisation of the secured property, 80% of the proceeds (in case of a loan) is applied to discharge the claim of the secured creditor and the remaining 20% to be further applied to discharge the claims of the unsecured creditors of the prior order of the statutory priority and court and bankruptcy costs. Any remaining amount will be returned to the secured creditor.

At the liquidation stage the claims of unsecured creditors are discharged in the following order of priority:

  • first, injury claims and claims for moral damages (mental suffering);
  • second, employment claims (wages and severance payment); and
  • third, all other claims including claims of secured creditors to the extent their claims are not discharged out of the proceeds of sale of secured assets or the value at which the secured assets were appropriated by the secured creditor.

There are special rules for discharging claims from a breach of obligations (ie, default interest, penalties, lost profit and damages).  Such claims would be discharged only after satisfaction of claims constituting the main obligations (ie, principal and interest).

Equity claims of shareholders may not be satisfied in insolvency proceedings and may be satisfied only upon liquidation of a company if any assets remain after all the creditors have been paid in full. Generally, shareholders with shareholder loans are treated as other creditors. However, according to recent court practice, claims of shareholders under shareholder loans can be rejected from inclusion in the register of creditors and may be treated as equity claims if such loans are proved to be detrimental to the interests of other creditors and it has not been proved that the use of shareholder loans instead of equity contributions was commercially reasonable and/or in good faith.

It would not be possible for the lenders to enforce their claims outside the insolvency proceedings. No set-off is exercisable in violation of the statutory order of priority described above. Certain security and payments may be challenged if created or made during the suspicious periods. Generally, the insolvency process may be quite long (up to a few years) and it is very difficult to reverse it once it has been commenced.

In addition, changes were made to the Russian insolvency legislation in light of COVID-19 to introduce moratorium for bankruptcy filings and enforcement overt the assets of companies mostly affected by COVID-19 and strategic businesses. Currently, the moratorium is in effect until 6 October 2020 but may be further extended by the Russian government. The lists of sectors of economy and entities which benefit from moratorium are regularly being updated. It is important to note though that a company can generally waive its right to benefit from moratorium by publishing the relevant waiver notice in the publicly available database relating to certain affairs of legal entities.

Project finance activity has developed substantially in the past few years, including due to the establishment of Project Finance Fabric led by State Corporate VEB.RF. The main areas of project finance are PPPs, oil and gas projects, development of infrastructure, utilities, waste processing and real estate.

The legislation has been developing step by step to bring the legal framework in line with international requirements for project finance standards. In addition to the Russian Civil Code provisions and the Law On Syndicated Loan regulating financing in general, there is a set of special laws and regulations available in each area of commercial activities which regulate the actions of all participants in project finance.

The Russian government provides an active support to project finance and selects some of the most strategically important projects which receive funding from the state budget. Amongst the major projects done on the basis of project finance are the reconstruction of Pulkovo Airport in St Petersburg, the construction of a wagon factory near St Petersburg, the Western High Speed Diameter in St Petersburg, the Moscow – St Petersburg toll road, the Yamal LNG project, Nord Stream, and the construction of the Polyvinyl Chloride Integrated Plant in Nizhniy Novgorod region.

In Russia, PPP projects can be implemented either as a concession on a basis of a concession agreement or public-private partnership on a basis of a PPP agreement. The Law on Concession Agreements (one of the main forms of PPP projects) was first introduced in 2005 and has been substantially amended since then following requests from the market participants involved in PPP activities. Separate from PPP project based on a concession agreement, in July 2015 the Law on Public-Private Partnership No 224-FZ ("PPP Law") was adopted on a federal level. 

Before the PPP Law was introduced, there had been two major streams of PPP activities:

  • projects executed on the basis of the Law on Concession Agreements such as the Moscow – St Petersburg toll road; and
  • projects executed on the basis of local PPP laws, such as the Pulkovo Airport concession.

Enactment of the PPP Law was a remarkable development of the Russian legislation that mitigated one of longstanding significant risks for PPP projects implemented on the basis of regional or local PPP laws – potential challenge of regional PPP projects in absence of the federal legal framework.

According to the PPP Law, PPP projects implemented on the basis of PPP agreements have the following features:

  • a private partner under the PPP agreement should be a Russian legal entity not controlled by government authorities;
  • unlike the Law on Concession Agreements, a number of objects of real estate and infrastructure cannot be the subject of a PPP agreement, eg, metro system, heating supply infrastructure, centralised systems of hot water supply etc;
  • unlike a PPP project implemented on the basis of a concession agreement, where the private partner obtains leasehold to the PPP object, PPP projects implemented by virtue of the PPP agreement envisage that the PPP object can be owned by a private partner;
  • a concept of direct agreements with lenders was first enshrined on a federal level in the PPP Law;
  • private finance initiative is provided under the PPP law, and it is largely similar to the one provided in the Law on Concession Agreements; and
  • with adoption of the PPP Law on the federal level, all local PPP laws would need to be brought in compliance with the federal PPP Law before 1 January 2025.

Procedure and Implications of Amends

Although the PPP Law provides that PPP projects launched and implemented on the basis of regional PPP legislation (prior to the enactment of the PPP Law) shall continue to be implemented on the terms and conditions existed as of the date of signing of the relevant PPP agreements, there is uncertainty concerning the procedure of potential amendments of such PPP agreements, including whether or not (in case of amendments being introduced) such PPP agreements should be brought in compliance with the PPP Law.

The major legal obstacles for the implementation of a PPP project are constant changes in the legislation framework (uncertainties in the budgetary legislation (in particular in relation to payment of termination payments), uncertainties related to implementation of some legal concepts such as bankruptcy remoteness of a Russian project company, and turnkey construction contracts, and certain problems with land legislation). It has become more common to apply Russian law to the majority of project documents; however, Russian law is not yet ready to accommodate all necessary international standards for PPP projects. 

The major economic obstacle for any project in Russia is its financial feasibility which is not always obvious from the beginning of the project as a result of inflation, currency fluctuation and changes in the Central Bank base rate. There is always an element of the necessity of a political will to push the project forward through its life.

The PPP documents are governed by Russian law. The other project documents may be governed by foreign law. In order to apply foreign law to a document, a foreign element must be present, which, in the case of a PPP transaction, would be a foreign lender, foreign general contractor, foreign shareholder or a foreign sponsor. The documents, other than those to which the state body is a party, do not require any special registration (with the exclusion of some security documents securing the financing which must be registered, please see paragraph 1 of section E (Guarantee and Security) above). The documents to which the state body is a party (eg, the concession agreement, the PPP agreement, the direct agreements, the lease agreements) would require the state approval at the relevant level.

There are no special taxes, fees or charges payable in relation to PPP projects. Certain payments may be required from an investor to have access to the PPP tender documents. The payment (by a concessionaire or a private partner) is subject to the commercial agreement between the parties to the PPP project.

On the PPP side, the responsible state authorities are federal, regional or local state authorities launching the respective PPP project (for instance, there are various Federation Units initiating PPP projects, such as Moscow Government, Moscow Region Government, Saint-Petersburg Government etc). The PPP projects implemented through a concession mechanism are usually based on the "BOT" model, ie, state/regional/local authorities retain an ownership in the project, allowing a concessionaire to operate the project throughout the life of the concession. The PPP projects have actively been launched in the following sectors: infrastructure construction (including toll roads, airports, utilities and waste management, medical hospitals), while the PPP projects implemented on a basis of PPP agreement, are based on the "BOOT" model.

From a broader project finance perspective, state authorities predominantly take a regulatory and supervisory function, including in the areas of state procurement and other tender requirements. The Federal Antimonopoly Service of Russia is the main authority supervising the compliance with state procurement and tender requirements as well as overseeing the investments into strategic businesses in Russia. Other state authorities regularly act in their narrow industry-based capacity (for instance, Rosprirodnadzor oversees the compliance with environmental laws).

It is usual for a project financed on a project finance basis to have the project company established in Russia. The jurisdiction of the shareholders and sponsors varies depending on applicable tax rates on withholding for shareholders loans and dividends. The lenders always prefer the shareholders to be located in a foreign jurisdiction where the enforcement over the shares in the shareholders would be easier to implement than the enforcement over the shares in the project company.

Funding of the project company is available in the form of shareholder loans and injection into the company's charter capital. Lenders provide funding on the basis of the common terms agreement and other agreements in accordance with international market standards. There are no special restrictions or international treaties relevant to PPP activities or general project finance activities.

More specifically below, three major areas are described that should be considered at the structuring phase of the project, namely:

  • Russian merger and acquisition control requirements;
  • tender/procurement criteria; and
  • security package to offer to lenders.

Russian Merger and Acquisition Control Requirements

There are several forms of government control over the establishment of Russian joint ventures (JVs).

Strategic investment control

The establishment of the JV may require clearance under the foreign investment regime if there is an acquisition of a strategic entity. Further development of the JV and its acquisition of assets in certain spheres of the Russian economy may require strategic investment control clearance. These sectors include energy, defence, media, manufacturing of pharmaceuticals, etc. The creation of a JV does not normally require clearance under this regime, however, if the JV acquires control over a strategic entity or its assets, then such acquisition would be subject to clearance by the Governmental Committee headed by the Prime Minister of Russia. If one of the JV partners is controlled by a foreign state, then a special cap on its ownership in a strategic Russian business may apply. 

Foreign investment control

The Foreign Investment Law requires that any acquisition of over 25% of shares in a Russian company by a company controlled by a foreign state is subject to clearance. Historically, this rule was interpreted as not being applicable to creations of companies. However, the regulator clarified that creations of companies are also subject to clearance if the foreign state acquires over 25% of such company. The clearance test is fairly formal: the Federal Antimonopoly Service needs to check whether the "acquired" company is strategic or not.

Merger control

The establishment of a JV in Russia could be subject to mandatory clearance in Russia as well as further acquisitions by the JV being subject to standard merger control rules and thresholds.

Tender/Procurement Criteria

Regarding tender/procurement requirements, it is common to have a requirement in the tender documentation to prove a certain level of expertise or experience of working in certain markets or to be a holder of a specific license. Needless to say there are requirements as to the value of the company's charter capital, solvency, shareholders' undertakings, balance sheet, asset value and various other financial indexes and indicators.

Security Package to Offer to Lenders

Obviously as required by project finance, the security package offered to lenders may need to address the main bankability risks of the project, aiming at limited recourse to the shareholders/sponsors of the project. Although each project is unique, both the lenders' and shareholders' expectations from the project are common, ie, accomplishing a successful and profitable project with good returns. To that end, there are various types of solutions to offer both to the lenders and to the shareholders in terms of the security and viability of the projects.

Bank financing, export credit agency financing and project bonds are all used for project financing in Russia if foreign lenders are involved, including in major projects such as Yamal LNG or Nord Stream.

Any subsoil resources, prior to extraction, are owned by the federal state. Subsoil resource deposits may not be sold or acquired, or made subject to security. The use of subsoil units may be granted by the state by way of a licence for various purposes, including exploration and extraction, normally for a fee. A licence can, in certain circumstances, be subject to a tender.

A licence is generally not transferrable (and cannot be made subject to security), subject to limited exceptions. Foreign investment in entities holding licences for exploration and extraction of certain major subsoil deposits is specifically regulated and generally requires governmental consent.

Production sharing agreements are in principle contemplated by Russian law – although there have been few precedents of major production sharing agreements in practice in respect of hydrocarbons, all implemented prior to the time the relevant Russian regulation entered into force. A notable example is the Sakhalin 2 project.

Oil and Gas

The right to export natural gas is given exclusively to PAO Gazprom and its wholly-owned subsidiaries, as well as, since recently, a limited range of other entities, such as holders of a licence for the construction of a liquefied natural gas plant (a notable example in practice is the LNG export from the LNG plant the Yamal peninsula). Those entities still need to obtain a licence for the export of natural gas.

Export of oil and natural gas, as well as certain petrochemicals, metals and certain other natural resources is subject to export duties, which are reviewed from time to time.

Further, in respect of the acquisition of certain natural resources, see 8.5 The Main Issues When Structuring Deals.

Below are some of the key legislative acts on environmental, health and safety protection:

  • Federal Law No 7-FZ dated 10 January 2002 "On Environmental Protection";
  • Labour Code of the Russian Federation No 197-FZ dated 30 December 2001;
  • Federal Law No 426-FZ dated 28 December 2013 "On Special Assessment of Working Conditions";
  • Federal Law No 52-FZ dated 30 March 1999 "On Public Sanitation and Epidemiology Welfare";
  • Federal Law No 323-FZ dated 21 November 2011 "On Basic Legislation on Health Protection of the Citizens of the Russian Federation";
  • Federal Law No 116-FZ dated 21 July 1997 "On Industrial Safety of Hazardous Production Sites"; and
  • Federal Law No 384-FZ dated 30 December 2009 "Building and Structure Safety Technical Regulations".

Regulatory bodies which oversee compliance with legislation in the sphere of environmental, health and safety laws include:

  • Federal Services on Labour and Employment;
  • Federal Services on Environmental, Technological and Atomic Supervision (Rostechnadzor); and
  • Federal Services on Natural Resources (Rosprirodnadzor).
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Law and Practice


Clifford Chance has had an established presence in Russia since 1991. Its Moscow office operates as a fully integrated part of the firm’s international network and provides a full service in each area of interest in the commercial sector, including banking and finance, corporate and M&A, capital markets, litigation and dispute resolution, real estate and tax, pensions and employment. The Russian banking and finance practice is well balanced between borrower and lender mandates, enabling the firm to offer constructive advice in the following areas: secured and unsecured bilateral and syndicated loans, leveraged and acquisition finance, asset finance and debt restructuring in Russia and the wider CIS region. Clients include borrowers, arrangers, lenders, debt and equity financiers, project sponsors, ECAs and international financial organisations. The firm advises clients on the full range of banking transactions across all sectors, including petrochemicals, power, metals, and mining, oil and gas, water, transportation (aircraft, rail, automobile) and telecommunications.

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