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. Last Updated: 07/27/2016

BUSINESS AND THE LAW: Finding Capital for Russian Firms




Despite events since Aug. 17, it should not be forgotten that there are profitable Russian companies looking for foreign capital to invest in their businesses; and there are still Western financiers who remain willing to do business in Russia.


At the moment, Western financiers are likely to have three principles when looking at granting financing to Russian companies, aside from the normal concerns relating to the profitability of the company.


One concern is the need to ensure that the financing does not fall foul of the debt moratorium announced by the government Aug. 17. The second concern is the desirability of avoiding the need to obtain a Central Bank license: This has always been a problematic issue in cross border financing, but it is likely to become even harder given the new political complexion of the Central Bank.


The third concern is the desirability of minimizing Russian risk. However profitable a Russian company now appears, there is always the danger of profitable companies being caught up in the maelstrom of an economic crisis.


With regard to the debt moratorium, this was a 90-day moratorium imposed on the repayment of the principal of loans exceeding 180 days f as well as on currency futures and margin payments on repo transactions. Loans for 180 days or less are not affected, nor are interest payments on loans exceeding 180 days.


A Western financier may be willing to grant a loan for longer than 180 days in which the principal will not be repayable until after the moratorium expires in November f although this involves gambling that the moratorium will not be extended.


In addition to not being caught by the debt moratorium, loans for 180 days or less do not require a Central Bank license. Loans for more than 180 days can also avoid the licensing requirement and instead be subjected to a notification procedure, if certain conditions are met.


It may be possible to structure the transaction in a way that avoids the problems of the moratorium and the license, and minimizes Russian risk.


For example, suppose a Russian company wants to obtain a loan from a Western bank to buy capital equipment for investment in its business. One way of structuring the transaction would be for the company to establish a foreign subsidiary that would be the borrower. Under Russian hard currency law, a Central Bank license is required for a Russian company to contribute to the share capital of a foreign firm. However, it is possible to establish a foreign company that does not mandate a contribution to share capital. For example, a limited liability company can be established in Delaware without a contribution to share capital.


The foreign subsidiary would thus enter into a loan agreement with the lender and buy the equipment, which would be leased to the Russian firm.


Provided that certain conditions are met, lease payments do not require a Central Bank license. The lease payments would then be remitted to the lender. In practice, the foreign subsidiary would establish an account with the lending bank and the lease payments would be paid directly into this account.


As additional security for the lender, the rights of the borrower/lessor under the lease would be assigned so that, in the event of a default in payments, the lender could end the lease and recover the equipment as security for the loan.


This framework does have disadvantages from the lender's point of view. Enforcement of the lease will ultimately require the institution of court proceedings in Russia if the lessee refuses to yield the equipment. This would be the case even if the lease were subject to international arbitration, since an international arbitration award has to be enforced through the Russian courts. Moreover, the equipment may be difficult to sell f particularly if it has been customized for the lessee's particular requirements.


The lender may therefore look for additional protection. One possibility would be an agreement whereby the Russian company sold its goods to the lender for resale on the open market. The resale proceeds would be transferred to the Russian company, but placed in an escrow account.


An escrow agreement could be entered into whereby a minimum balance had to be maintained and would be used to service the lease payments, and hence the loan, while the balance could be used by the Russian firm for its own purposes.


It should be noted that under Russia's hard-currency laws, hard currency receivables of a Russian resident (which includes a company) must be placed in the resident's authorized Russian bank account unless otherwise permitted by a Central Bank license. Thus, the escrow account has to be in a Russian bank.


Neil Budd is a lawyer in the Moscow office of the international law firm Watson, Farley & Williams.