Project Finance 2020

Last Updated November 03, 2020


Law and Practice


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Project finance is well-developed and widespread in Russia, especially in the oil and gas sector, for toll roads, airports, bridges, tunnels, railways, power facilities and community-purpose buildings, such as schools, hospitals, kindergartens and waste disposal. Projects are typically carried out either as general limited recourse projects, without the support of the state, or as Public Private Partnerships (PPPs) with state involvement.

A key recent development is the approval in 2018 by the Russian Government of the programme "Project Financing Factory" in order to push the process of project finance implementation in Russia. VEB.RF, which is not a commercial bank like Sberbank, VTB or Gazprombank, but rather a non-profit state development corporation, (established by Russian federal law for the public good) was appointed as the operator of "Project Financing Factory".

The "Project Financing Factory" is a project finance mechanism for investment projects in Russia’s priority industries. The mechanism allows borrowers to obtain funding under syndicated loan (credit) agreements and raise more funds to deliver state-backed projects. Key project selection criteria are the following:

  • the value of the project is to be above RUB3 billion;
  • the project is to be located in the Russian Federation;
  • the payback period can be up to 15 years;
  • the sponsor's equity investment is to be 20% or more; and
  • the borrower is a project company.

It is expected that use of the "Project Financing Factory" will help to significantly increase the number of project finance deals in the forthcoming years and will help to increase the industrial potential of Russia.

Key Project Finance Deals Completed in Recent Years

The most significant project finance deal completed in recent years was for liquefied natural gas (LNG). The Yamal LNG was a USD19 billion project financing of a joint venture between Novatek, Total, CNPC and Silk Road Fund for the development of a major new LNG liquefaction plant and related facilities located on the Yamal Peninsula, Russia.

The unique location of the Yamal Peninsula offers an opportunity for flexible and competitive logistics, enabling year-round supplies of LNG to the Pacific and European markets.

The Yamal LNG project represents one of the largest project finance deals globally. The Russian government declared it to be of national interest. Financing was provided by CDB, CEXIM, Russian banks (under EXIAR cover), and international export credit agencies.

Another significant project finance deal completed in recent years was Gazprom’s Amur Gas Processing Plant, which will become one of the world’s largest gas processing plants and the biggest in Russia. Its design capacity is 42 billion cubic metres of natural gas per year. The plant will feature six process trains. The commissioning and start-up of the first two trains is scheduled for 2021. It will play a significant role in supplying natural gas to China through the Power of Siberia pipeline.

The project sponsors are almost always the shareholders of the project company. The shareholders are also equity investors in the share capital of the project company and guarantors of specific obligations of the project company. Depending on the sector, the institutions acting as sponsors will be different, but predominantly it is various Russian and international corporates.

As to the lenders, currently Russian banks are playing a key role in project finance deals. One of the reasons for this is the sanctions imposed by the USA and EU in 2014, which limited the ability of some Russian borrowers to access long-term debt financing from western markets. European export credit agencies, and the Russian Agency for Export Credit and Investment Insurance (EXIAR) still play a significant role in the Russian market by providing guarantees and insurances. EXIAR provides insurance support and issues guarantees to counterparties of Russian export-oriented companies. However, major project finance deals (due to their magnitude) also attract international lenders and ECAs.

Most PPP projects in Russia are implemented in the following areas: communal and energy infrastructure, social infrastructure and transport infrastructure. PPP projects in the information, communication and other spheres are less common.

There are two main legislative acts for PPPs in Russia:

  • Concessions Law; and
  • PPP Law.

On 1 January 2016, the PPP Law came into force. Prior to that, most of Russia's PPP projects were implemented under the Concessions Law, adopted in 2005, and also on the basis of regional legislation on PPPs, as most regions of Russia adopted and implemented their own PPP laws long before the PPP Law was enacted. With the PPP Law coming into force, all regional laws on PPP will have to conform to the provisions of the PPP Law by 2025. Failing this, such regional laws will only be effective insofar as they do not contradict the PPP Law.

Such legislation unification is expected to help increase the number of PPP projects, as currently, inconsistency in legislation is one of the key obstacles to the increase in the number of PPP projects.

Due to the above, the main form of implementation of projects in the form of public-private partnerships in Russia is a concession. The majority of infrastructure projects (mainly in the municipal sector at the municipal level) are already being implemented and will be implemented in the form of a concession agreement. Good examples of successful infrastructure projects done on public-private partnership basis are Pulkovo Airport in Saint Petersburg and a toll road from Moscow to Saint Petersburg.

There are some main issues relating to the Russian project finance market, which need to be considered before procuring project finance in Russia.


Foreign companies need to carefully consider the current sanctions regime, as a number of Russian companies are subject to various sanctions imposed by the EU and the USA. There is also potential imposition of new sanctions by the USA and the EU. This risk may be mitigated by carefully drafted sanctions clauses in the finance documentation.

National Currency Risk

The Russian national currency may depreciate and fluctuate, especially after the imposition of new sanctions or a drop in oil prices. This risk may be mitigated by entering into cross-currency derivative instruments.

Political Risk

This risk may be partially mitigated by involving Russian sponsors, Russian banks and the Russian Agency for Export Credit and Investment Insurance in the project and obtaining assurances from the relevant government departments, especially on the availability of consents and permits.

Uncertainties of the Russian Legal System and Other Legal Risks

There is sporadic inconsistency of interpretation of Russian legislation by the Russian courts and a high degree of discretion on the part of governmental authorities. Laws may also change quite significantly, for example, the Russian tax system is subject to frequent changes in tax legislation, which sometimes occur at short notice and apply retrospectively. The parties usually include tax gross-up and tax indemnity provisions in their contractual arrangements to allocate tax risks.

Unless creation of security over an asset is prohibited or restricted by law such asset may be taken as security. Security over assets located in Russia or over contractual rights governed by Russian law is usually taken in the form of a Russian law pledge or mortgage. The type of security depends on the type of secured assets.

Assets located outside Russia or rights governed by foreign law would be governed by the laws of the jurisdiction where those assets are located or by the laws governing the underlying contract.


A pledge (залог) can be created over almost any asset, including property and contractual rights. Property which cannot be subject to enforcement according to law (such as goods of strategic importance), property, which demands security which is inseparably linked with the personality of the creditors (such as child support payments) and rights which may not be assigned as a matter of law (such as rights granted under a licence) cannot be the subject of a pledge. If the underlying transaction is notarised then the pledge must also be certified by a notary.


A mortgage (ипотека) is a type of pledge creating security over immovable property (which includes ships and aircraft). Pledge and mortgage agreements should be made in writing.

Granting and Recognitions

A pledge or mortgage can be granted by the debtor itself or by a third party to secure the obligations of the debtor. A pledge or mortgage gives the holder the right to satisfy the secured debt out of the proceeds of sale of the secured property. In certain cases it can give the secured parties a right to obtain title to the secured property or receive income from such secured property to settle the debt.

Importantly, Russian Insolvency Law only recognises a pledge or a mortgage over an asset as security which affords the creditor the status of secured creditor. This entails the right of the creditor to have its claim satisfied out of the proceeds of the sale of such an asset ahead of all other creditors' claims (with certain deductions for the benefit of the court, and enforcement costs and tortious and employment claims).

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.

However, as a result of recent changes to the Civil Code, in theory it is possible to create a general pledge over different types of property (other than immovables) which are described so that they can be identified at the time of enforcement. The description may refer to all the property of an obligor or certain types or generic features of the pledged property. For this type of pledge to be used in practice further regulation will need to be developed to distinguish it from other types of security specifically regulated in the Civil Code (such as a pledge of stock in turnover), to determine when and with respect to which assets the security interest arises and terminates, and address any issues in the context of registration over movables. Such legislation has not been put in place so far.

There are a few perfection requirements under Russian law. The most relevant perfection requirements for project financing transactions relate to:

  • becoming effective:
    1. a mortgage which requires registration: for real estate – in the Immovable Property Register; for Russian aircraft – in the Aircraft Register of Rights; and for Russian ships – in the ship register at the relevant port of registry;
    2. a pledge of shares: must be recorded in the shareholders' register or custodial account of the security provider with the share registrar or custodian respectively; and
    3. a pledge of a participatory interest: must be notarised and registered in the Register of Legal Entities; and
  • starting from 1 July 2014 an electronic register of notices of pledges over any assets to date not subject to any registration was launched in Russia.

As a result, security over movable assets, receivables and contractual rights (including future assets) may be recorded in the register through a notary. This registration does not affect the effectiveness of the security but serves as a public notice to third parties of existing encumbrances and establishes the priority of claims. The legal consequences of having registration of the new pledges started to apply with the launch of the register. Pledges created before the launch of the register are also effected and if they were registered by 1 February 2015, their priority would have been determined by reference to the date of execution of the pledge agreement and not the date of registration.

Out-of-Court Enforcement

In order to pursue successful out-of-court enforcement over most secured assets in Russia, security documents must be certified by a notary, in which case enforcement through a notary would be available without involvement of a court. There are no registration requirements in relation to loan agreements, guarantees or suretyship agreements, other than submission of a relevant document with an authorised Russian bank before a payment is made abroad.

There are a variety of fees and expenses payable for registration and/or notarisation, but they are unlikely to be significant enough to effect how a transaction should be structured. Some fees payable to notaries may be significant enough to effect the enforcement method of security, although such fees are limited by a cap.

As a general rule, assets subject to security must be described in the pledge or mortgage agreement in such way as to enable them to be clearly identified. However, for certain types of secured assets, such as contractual rights, a description enabling identification of the secured rights at enforcement would be sufficient.

Secured creditors usually wish to take security over insurances, eg, insurance relating to an asset which is subject to security (for loss or damage or consequential loss of profit/business interruption) or insurance proceeds under a third-party liability policy.

It is widely accepted that it is not possible to assign rights under a Russian third party liability insurance policy and business interruption insurance policy, and although it is possible, subject to certain limitations, to assign rights under a property insurance policy (in fact to assign the benefit of a policy to receive payment from the insurer), it is generally considered not practicable to do this.

Russian law gives a secured creditor with a pledge or mortgage over the insured property a priority claim to any property insurance proceeds received by the security provider.


It is common practice for a secured creditor to be named as beneficiary on the property insurance policy to ensure it can receive the proceeds directly. It is not clear whether non-vitiation insurance is possible under Russian law. This is not contemplated by legislation and it appears not to be used in practice. It is generally possible for a lender to be also named as co-insured under a third-party liability policy, but beneficiaries under such policy will be only the persons to whom harm may be caused.

A lender may not benefit (as a result of an assignment or otherwise) from business interruption insurance as Russian law provides that such insurance may only be for the benefit of the insured and the lender may not be named as co-insured under such policy.

As specified, security over key assets is registrable in various registers and may be checked by the lenders.

Under Russian law the security automatically ceases to have effect upon the secured obligations being discharged in full, but sometimes the borrower may also ask the lender to deliver a release letter confirming that the secured obligations are discharged in full and the security no longer exists.

Further, if the security interest is registered, deregistration is necessary and may be made only with the assistance of the lender.

Security may be enforced only if the person whose obligations are secured by such security fails to perform the secured repayment obligations. Enforcement on the basis of an event of default arising on other grounds (eg, breach of representations or financial covenants) is not possible; however, non-payment of the loan following acceleration would permit enforcement.

As a general rule, 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. The most common way of enforcement is a sale of the secured assets through the courts or, if agreed between the secured creditor and the security provider, without recourse to a court. Appropriation of the secured assets is also possible.

A pledge or mortgage may not be enforced if a default is insignificant and the outstanding amount is clearly not commensurate to the value of the secured assets, which, in particular, is presumed to be the case 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.

Given the non-possessory nature of a Russian pledge and mortgage, out-of-court enforcement of security over most assets may not be available in the event of a lack of cooperation of the security provider. There is no requirement to certify any security documents by a notary for the security to become effective (other than the security over a participatory interest); however, if the security documents containing out-of-court enforcement procedures are executed before a notary, out-of-court enforcement will be available through obtaining a notary's executory endorsement without application to the courts on enforcement.

Under Russian law parties to a contract are allowed to choose the governing law to govern that contract. Accordingly, courts of Russia generally uphold a choice of foreign law in a contract. However, there are certain qualifications:

  • a Russian court may not apply the laws of a foreign jurisdiction if the consequences of such application would be contrary to public policy of Russia or where certain relations between the parties are regulated by Russian mandatory norms of direct application (imperativniye normy) regardless of the otherwise applicable law;
  • the choice by the parties of a foreign law in the absence of a sufficient foreign element (inostranniy element) may be ineffective; and
  • if at the time of the choice of applicable law all elements relevant to the transaction are effectively connected only with one country, the choice of foreign law will not prejudice the application of mandatory norms of that country.

Russia is a member state of the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the courts of the Russian Federation would recognise and enforce an 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.

The recognition and enforcement in the Russian Federation of a court judgment obtained in a foreign jurisdiction would be subject to and needs to be conducted in accordance with the provisions of the treaty between the Russian Federation and the relevant country on legal assistance and legal relationships with respect to civil and criminal cases.

A Russian court will not in certain cases recognise and enforce a foreign arbitral award or judgment, including in certain cases where the dispute is within the exclusive or special competence of the Russian courts, or where there is a judgment rendered by a Russian court on a dispute between the same parties, the same subject matter and the same grounds, or where it considers the execution of such award (or the matters adjudicated on therein) to be contrary to Russian public policy.

There are no restrictions on a foreign lender’s ability to enforce its rights under a loan or security agreement. However, as the official language in Russian courts is Russian, a foreign lender would have to prepare a Russian translation of the documents produced by its home country’s government.

There are no specific restrictions on granting loans by foreign lenders.

There are no specific restrictions on granting of security or guarantees to foreign lenders, and foreign lenders may take security or guarantees in the same manner as Russian lenders do.

Russia is a party to more than 80 bilateral investment promotion and protection agreements. Russia is also a party to the World Trade Organization (WTO) General Agreement on Trade in Services 1994.

From a tax perspective, as of 1 January 2018 the Russian Federation has entered into 83 bilateral double-taxation treaties with other countries. Generally, the double-taxation treaties concluded by Russia follow the Organisation for Economic Co-operation and Development (OECD) Model Double Taxation Convention on Income and on Capital 1977 (OECD Model Tax Convention 1977).

Under Russian Currency Law, the Russian Central Bank is authorised to establish unified rules for the filing of information and supporting documents by Russian residents and non-residents with Russian authorised banks when any currency operations between residents and non-residents are performed. In particular, a borrower must submit to a Russian authorised bank an original or a certified copy of, or an extract from, the facility agreement within a specified time period, to ensure that such agreement is retained by a Russian authorised bank for monitoring (ie, for the Russian authorised bank as an agent of currency control to assign a unique identification number to the facility agreement and to keep records of payments constituting currency operations under such agreement in its report of banking control on the basis of information and documents provided by the borrower) (the "Monitoring Bank").

Any settlements between the borrower and non-residents under the facility agreement through the borrower's accounts with a Russian authorised bank must be performed only through the borrower's accounts held with the Monitoring Bank or another Russian authorised bank to which monitoring of the relevant agreement is transferred in accordance with the applicable currency regulation. Failure by the borrower to ensure that the facility agreement is retained for monitoring by the Monitoring Bank or termination of such monitoring will adversely affect the ability of the borrower to debit loan proceeds to its account and/or repay a loan or pay interest and fees using its accounts with a Russian authorised bank, but will not affect the validity of the Borrower's obligations under the facility agreement

Russian Currency Law also requires that all currency proceeds under foreign trade contracts between resident exporters and non-resident buyers (such as sales contracts) are credited to the exporter's accounts with a Russian authorised bank within the timeframes stipulated in such foreign trade contract, save as expressly permitted by the Currency Law.


The Currency Law provides for an exemption from this mandatory repatriation requirement in the event that foreign trade currency proceeds are credited to the accounts of residents or third parties abroad for the purposes of discharging loans obtained by Russian residents from residents of the member states of EAEU or residents of a foreign state which (i) exercises the exchange of information under the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Information of 29 October 2014, or (ii) is a party to any other international agreement with the Russian Federation on automatic exchange of financial information, for a term exceeding two years (the "Exemption").

The Currency Law is not clear as to whether the Exemption may be used with respect to the application of foreign trade proceeds against prepayments of a loan (including as a result of acceleration) before the expiry of such two-year period.

Further, although Russia is a EAEU member, there is a risk that the Exemption does not apply to loans (or portion of a loan in a syndicated facility) provided by Russian lenders.

An additional regulator's position is that the Exemption does not apply when export proceeds are used towards payments other than principal, scheduled interest and potentially fees under the relevant loan and within the amounts expected to be due under the loan during the period within which the relevant export proceeds must be repatriated.

Project companies can establish and maintain foreign currency accounts, both in Russia and in other jurisdictions.

To open a bank account outside Russia, Russian entities do not require a licence or any prior consent. However, opening and maintaining bank accounts outside Russia involves substantial reporting requirements, including the requirement to notify tax authorities of the account being opened and the obligation to report regularly to tax authorities on the cashflows going through the account.

There are significant restrictions on the types of payments that can be processed via a Russian project company's accounts outside Russia. For example, loan proceeds can only be paid directly into such account if the loan meets certain criteria, including on the tenor (more than two years) and the jurisdictions of the lenders. Lenders must be residents in OECD countries or Financial Action Task Force countries.

Export proceeds must generally be paid into Russian exporters' accounts in Russia (repatriation requirement), subject to limited exceptions, mainly where they are applied to discharge a Russian borrower's obligations under an eligible loan. The repatriation requirement is typically an important factor in structuring cashflows in a Russian project finance deal that involves export contracts.

Neither financing or project agreements need to be registered or filed with any government authority or otherwise need to comply with local formalities in order to be valid or enforceable. Certain security documents may need to be registered with the relevant state registers.

In general no licence is required for owning land in Russia.

Extraction of almost any natural resources (including gas and crude oil), is not possible without a licence. Depending on the location and strategic importance of the land plots a licence may be issued to Russian companies only.

Russian law does not recognise the concept of a trust. However, in 2014 a new concept was introduced which allowed security over a single asset to be shared on a pari passu basis among multiple secured creditors. A designated security agent holds the security in favour of the creditor group.

Each secured creditor must be recorded as a secured creditor in various state registers. This makes assignments and transfers more burdensome as new creditors must be properly recorded as secured creditors.

In cross-border project finance deals (which typically involve English law facility agreements) the current practice is to use parallel debt or joint and several creditors structures. These structures effectively allow a single security agent to hold security created for the entire debt under a syndicated facility agreement. The structures have not yet been tested in Russian courts. However, they are generally believed to be viable.

Where security interests compete with each other, the priority will be determined by way of the time at which the security interest is perfected. A security interest, which is perfected earlier, will have priority over security interest, which is perfected later.

A concept of contractual subordination was recently introduced into Russian law with effect from 1 June 2015. However, in the absence of any corresponding changes to the bankruptcy legislation any contractual subordination provision would be considered ineffective and nonbinding for the Russian company in insolvency. However, the subordination agreement should remain binding for the creditors which are the parties to it and therefore the amounts received by a creditor from an insolvent company in breach of the agreement must be shared according to the terms of the subordination agreement.

Russian law does not require a project company to be incorporated under the laws of Russia. However, in the case of PPP projects, a project company must be a company incorporated under the laws of Russia, usually in a form of a limited liability company.

As a matter of practice, it is extremely rare that a project company is a non-Russian company, and a typical form of a project company is a limited liability company.

The main insolvency procedures are supervision (which is a mandatory stage for any further procedure), financial rehabilitation and external administration (aimed at recovery of the debtor) and liquidation.


Supervision (a compulsory insolvency procedure) involves the appointment by the court of an interim administrator whose primary aim is to preserve the company's assets while conducting a financial audit of the debtor to determine the possibility for the company to restore its solvency and includes an initial registration of creditors' claims.

Financial Rehabilitation

Financial rehabilitation (not a compulsory insolvency procedure) is initiated by the court at the petition of the company's shareholders or other persons willing to put up collateral for the company's debts and is primarily aimed at restoring the company's solvency and the satisfaction of creditors' claims according to a debt repayment schedule.

External Administration

External administration (not a compulsory insolvency procedure) is initiated by the court generally at the petition of the general meeting of the creditors and involves the appointment of an external administrator to collect in debt, make an inventory of assets and prepare a plan for restoring solvency (which must be approved by a majority of creditors' voting at a general meeting of the creditors).


Liquidation (the last stage of insolvency proceedings) starts by declaring the company bankrupt. The company may generally enter into liquidation if the insolvency court determines that the company shows "signs of bankruptcy" (ie, if the unpaid debt is overdue for at least three months from the date when it must be paid) and there are no grounds to:

  • instigate any recovery stages of bankruptcy (ie, financial rehabilitation and external administration);
  • approve a voluntary arrangement; or
  • terminate bankruptcy proceedings or dismiss a bankruptcy petition.

There is no reorganisation plan as such in Russian bankruptcy proceedings.

Voluntary Arrangement

A voluntary arrangement can be entered into at any stage of bankruptcy. The general meeting of the creditors can petition for a voluntary arrangement upon approval by a majority of creditors (other than the creditors with first and second priority) whose claims are included in the register of creditors, and with the unanimous consent of those creditors whose claims are secured by pledge or mortgage over the company's assets. To have legal force a voluntary arrangement must be approved by the bankruptcy court.

A voluntary arrangement binds the company and the creditors whose claims were included in the register of creditors (irrespective of whether they voted against such arrangement or did not vote). From the date of court approval of the voluntary arrangement, the bankruptcy proceedings terminate and the debtor is obliged to start the discharge of the creditors' claims in accordance with the repayment schedule set out in the voluntary arrangement. The existing security (in fact, as mentioned, only pledges or mortgages) over the debtor's assets in support of the debtor's obligations is retained, unless otherwise provided in the voluntary arrangement.

The voluntary arrangement can be terminated only in respect of all creditors bound by it and arguably only in the event of the debtor's failure to perform, or a material breach of, payment obligations due to creditors whose claims constituted at least 25% of all the registered creditors' claims as of the date of approval of the voluntary arrangement. If terminated, the company is brought back to the insolvency stage at which the voluntary arrangement was concluded, with claims restored to the amounts, according to the register of claims existing as of the voluntary arrangement approval date. If the debtor fails to perform the voluntary arrangement, a creditor may enforce the claims due through the court which dealt with the insolvency of this debtor without initiating new bankruptcy proceedings and without terminating the voluntary arrangement.

If new bankruptcy proceedings are subsequently brought against the company, the creditors that entered into the voluntary arrangement will have the right to claim only in the amount provided for under the voluntary arrangement.

Once insolvency proceedings are commenced, there is a general moratorium on the levying of execution against the property of the insolvent company. Pledged and mortgaged assets are segregated from the other assets and may not be sold without the consent of the secured creditors. The secured creditors have a right to enforce their security at the financial rehabilitation and external administration stages (enforcement at the first stage of supervision is prohibited).

At the stage of liquidation enforcement is not possible, instead all the debtor's assets (including secured assets) are subject to sale at an auction conducted by a court appointed liquidator or a specialised organisation approved by the general meeting of the creditors, but secured creditors must determine the starting price and the terms of auction with respect to the secured assets.

When enforcement of security is allowed, it may only be through court proceedings (through the bankruptcy court) with a sale of such secured property to be at an auction organised by an "administrator" or a specialised organisation (ie, out-of-court enforcement is not allowed). Enforcement against secured property will be allowed if:

  • there is a risk of damage to the secured property which will result in a significant decrease of its value as well as the risk of loss of such property; or
  • such enforcement would not make it impossible to restore the debtor's ability to pay its debts (the impossibility to restore the ability to pay its debts as a result of such enforcement must be proved by the debtor).

Priority upon Solvent Liquidation

Generally, upon solvent liquidation of a company, the claims will rank in the following order:

  • 1) claims for harm inflicted to health or life;
  • 2) employment claims and royalty claims under copyright agreements; 
  • 3) mandatory claims of the state budget and non-budgetary funds (such as taxes);
  • 4) claims of other unsecured creditors, including the claims of secured creditors to the extent their claims are not discharged from the sale proceeds of the secured assets; and
  • 5) claims of shareholders.

Claims of secured creditors are discharged from the enforcement proceeds in priority to all unsecured creditors, but behind the statutory prioritised claims of the unsecured creditors describes in bullet points one and two above which have arisen before the creation of the security. Current claims which constitute costs and expenses necessary to implement liquidation of a company rank ahead of claims of all other priorities. Claims of creditors (including mandatory claims of the state budget) arising from a breach of obligations (eg, default interest, penalties and lost profits) must be discharged only after satisfaction of claims of priorities reflected in bullet points one to four above.

Priority on Insolvency

Upon the commencement of bankruptcy proceedings, the satisfaction of unsecured monetary claims against the insolvent company is generally subject to the following statutory order of priorities:

  • 1) claims for harm inflicted to health or life and claims for moral damages (mental suffering);
  • 2) employment claims (wages and severance payments) and royalty claims under copyright agreements; and
  • 3) all other claims of creditors including the claims of secured creditors to the extent their claims are not discharged out of the sale proceeds or the appropriation value of the secured assets.

For claims referred to in bullet point three claims arising from a breach of obligations (such as default interest, penalties, lost profits and damages) would be discharged only after satisfaction of claims constituting the main obligations (such as principal and interest) irrespective of the order set by the agreements constituting such claims. Within each order of priority, in case there are insufficient proceeds to discharge all creditors' claims in full, unsecured claims are discharged on a pro rata basis.

So-called current claims (essentially, monetary claims that have arisen after the commencement of insolvency proceedings including wages to employees, court and bankruptcy costs, taxes, payments due to state budget and utilities and operational costs) together with the costs of any measures to prevent industrial or environmental harm, rank ahead of both claims under the statutory order of priorities and claims of all creditors which have arisen before the date of acceptance of a petition for the debtor's bankruptcy, and are settled in accordance with the statutory order of priority established for current claims. Within the same order of priority, current claims are discharged in a calendar order determined by reference to the date of receipt of the relevant claim by the bank at which the debtor has an account (the bank in turn must be instructed by the insolvency administrator to satisfy the claim immediately upon it maturing).

Settlement of Claims of Secured Creditors Out of the Enforcement Proceeds

At the liquidation stage of insolvency, claims secured by a pledge or mortgage over the debtor's assets are settled out of the proceeds of sale of such assets in priority to all other claims, subject to a requirement to allocate part of the proceeds to discharge statutory prioritised claims described in bullet points one and two of "Priority on Insolvency" above, and certain current claims according to the following allocation rules:

  • 80% (under a credit agreement) or 70% (in all other cases) of the proceeds (in an amount not more than the aggregate amount of principal and interest) is applied to discharge claims of the respective secured creditor; and
  • the remaining 20% or 30% respectively is to be deposited in a "special account" to be further applied as follows:
    1. up to 15% or 20%, respectively, for the satisfaction of unsecured claims of the statutory prioritised claims described in bullet points one and two of "Priority on Insolvency" above, to the extent the unencumbered property of the debtor is insufficient to settle these claims; and
    2. the balance - for the satisfaction of court and bankruptcy costs (including costs and fees incurred in connection with the sale of the secured property), payments of fees of the court-appointed administrator and persons retained by such court-appointed administrator for the purposes of administration and any remaining balance, for the satisfaction of other current claims.

To the extent unsecured statutory prioritised claims, described in bullet points one and two of "Priority on Insolvency" above, are satisfied, the remaining proceeds of sale of secured property are paid to the respective secured creditors. If the secured claim is discharged in full, the remaining proceeds are applied in satisfaction of outstanding current claims and the balance is included in the bankrupt estate.

Insolvency law expressly recognises only a pledge or mortgage as giving the status of a secured creditor. Therefore, it is unlikely that holders of other types of security (such as security assignment, for example) would enjoy the rights of secured creditors.

From the date of commencement of the first insolvency proceeding (supervision) set-off against the debtor's claims is prohibited if it is in breach of the statutory order of priority or such discharge results in the preferential satisfaction of claims of one creditor over another within the same order of priority. Such prohibition applies throughout any further insolvency proceedings.

There are no entities that are excluded from bankruptcy proceedings under Russian law.

Insurance can be provided only by licensed Russian insurance companies, which are heavily regulated. There are no restrictions on paying insurance proceeds to a foreign creditor, if such creditor is a beneficiary under the relevant insurance policy.

Insurance claims can be paid directly to foreign creditor that is named as a beneficiary on an insurance policy (that is possible only under property insurance that is subject to security in favour of that foreign creditor).

Generally, Russian project companies can obtain insurance only from Russian insurance companies. In cross-border transactions, foreign lenders are not always satisfied with the credit rating and standing of the proposed Russian insurer and require reinsurance from an internationally recognised reinsurer, with the lender having an interest in or a claim for reinsurance proceeds. The latter can potentially give rise to regulatory concerns for the Russian insurer.

A Russian company or a foreign company acting in Russia through its permanent establishment, who pays Russia source interest may be obliged to deduct profits tax from that interest. The obligation to withhold is imposed by the Russian source rules which apply to Russia Source Interest. Withholding Tax on interest is chargeable at the basic rate, currently 20% unless the country of a receiving person has entered into a tax treaty with Russia, in which case the withholding tax may be exempted or reduced in accordance with such tax treaty. Recently Russia announced that majority of its tax treaties will be revised and a process has already started.

The obligation to deduct tax at the source in respect of Russia Source Interest applies to payments to non-resident entities of any type of interest, which is defined as pre-determined income, including in a form of a discount, payable in connection with a debt obligation of any type (including interest payable under convertible and profits-sharing bonds, promissory notes or bank deposits), irrespective of the way such obligation is formalised or its term.

Russia Source Rules

Russia applies withholding tax to interest payable in connection with:

  • state and municipal issued securities, whose terms and conditions provide for payment of income in the form of interest; and
  • any other debt obligations of Russian resident companies or permanent establishments of foreign entities.

However, there are several potential withholding tax exemptions. There is no obligation to deduct tax from Russia Source Interest:

  • in respect of interest income payable to entities incorporated or tax resident in Russia;
  • in respect of interest income attributable to a Russian permanent establishment of a foreign entity, provided a Russian payor acting as a withholding tax agent is aware of such attribution of interest income and obtains a notarised copy of the payee's certificate of registration with the Russian tax authorities issued not later than the previous tax year;
  • in respect of interest income payable under sovereign debt securities and securities issued by regional or municipal authorities;
  • in respect of interest income payable under quoted corporate bonds issued by Russian companies under foreign law;
  • in respect of interest income payable under a loan provided by a foreign issuer in lieu of a quoted Eurobond issuance; and
  • where a lender is entitled to an exemption from Russian tax under a double-taxation treaty.

Authorisation and Double-Taxation Treaties

There is no prior authorisation requirement, however, benefits under a double-taxation treaty are not automatically available. In order to enjoy the benefits, a foreign entity, generally, must submit to the Russian payer a tax residency confirmation certified by the competent authorities, confirming its tax residence for the purposes of the relevant double-taxation treaty prior to the first payment of interest. Generally, this form needs to be apostilled and is subject to annual renewal.

No residency confirmation is required from foreign banks, provided the Russian payer is in the position to confirm their tax residency based on publicly available sources. In addition to tax residency confirmations, Russian tax legislation sets forth the obligation of foreign recipients of income to provide Russian payers with an income beneficial entitlement confirmation. As opposed to the tax residency confirmation, the tax legislation does not provide for any specific requirements as to the form or contents of an income beneficial entitlement confirmation.

The income beneficial entitlement confirmation is generally viewed as a self-certification. At the same time, due to the way beneficial entitlement to income (beneficial ownership) is defined in the law and specifics of how it is understood by Russian tax authorities, Russian borrowers tend to request from foreign lenders additional information and documents to support non-application of or application of reduced Russian withholding tax on interest.

Russia currently has no stamp tax.

There are a variety of fees and expenses payable (for example, if notarisation is required or for registration of security with appropriate registries), but they are unlikely to be significant enough to affect how a transaction should be structured. Some fees payable to notaries may be significant enough to affect the enforcement method of the security, although such fees are limited by a cap.

Under Russian law, loans between commercial parties do not have a specific limit as to the amount of interest that can be agreed to and charged.

However, a Russian court has the right to reduce the amount of any penalty, default interest, fine or similar payment obligation imposed on any person under the finance documents in circumstances of breach or default by such person on the grounds that it is clearly incommensurate (nesorazmerniy) with the consequences of the breach or default and, with respect to a penalty (neustoyka), if it is also proved that payment of the penalty may result in an unjustifiable gain for the beneficiary thereof.

If all parties to a project agreement are Russian companies then such project agreement will be governed by Russian law. However, if one of the parties is a non-Russian company, in most cases such project agreement will be governed by English law.

As with project agreements, if all parties to a financing agreement are Russian companies then such financing agreement will be governed by Russian law. Where there is enough of a "foreign element", in most cases such financing agreement will be governed by English law.

Security documents in relation to security located in Russia are usually governed by Russian law and security documents in relation to security located outside Russia would be governed by the laws of the jurisdiction where that security is located.

Although, as a general rule, the parties to a transaction are free to choose the law that will govern that transaction, provided that at the time of making that decision, the transaction is not connected with Russia only, security documents in relation to assets located in Russia may need to be made subject to Russian law for the following reasons:

  • any transactions involving real estate (including land and buildings) in Russia or lease rights in relation to such real estate located in Russia must be governed by Russian law including mortgage agreements;
  • although other security documents such as pledges may in principle be made subject to foreign law, it is usually advisable to use Russian law when the assets are located in the Russian Federation to avoid conflict of law problems between the effect of the foreign law security interests and Russian law rules on the creation of interests in property and their enforcement - if the security provider is a Russian entity, it may also be preferable to take a Russian law security over the assets located in Russia to avoid complications with recognitions of priority of the security provider as against other non-secured creditors participating in an insolvency of the Russian security provider;
  • even if there is no problem with recognition where security documents are governed by foreign law, where the secured assets are located in Russia the Russian courts (following clarifications by the Supreme Court) should impose Russian law enforcement requirements on the security and refuse to enforce the security according to the enforcement procedure provided for in the security agreement and/or available under the governing foreign law;
  • in order to pursue successful out-of-court enforcement over most secured assets in Russia, security documents must be certified by a notary, in which case enforcement through a notary would be available without involvement of a court – notaries can certify only documents governed by Russian law.
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Clifford Chance is one of the world's leading law firms and combines the highest global standards with specialised local expertise. The firm has over 3,200 legal advisers in 32 offices across 21 countries. Clifford Chance focuses on providing unrivalled service in each area of interest in the commercial sector, including banking and finance, corporate and M&A, real estate and construction, litigation and dispute resolution, tax, financial regulation and capital markets. Clifford Chance CIS Limited was established in Moscow in 1991 and is one of the leading international law firms in Russia, served by approximately 60 lawyers, including seven partners.

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