Cyprus: A Russian Dimension To The Eurozone Crisis

With the end of summer, Europe's political leaders are intensifying their efforts to address the Eurozone's economic and monetary crisis. For a variety of reasons, including a favorable tax treaty with Russia, Cyprus has become the preferred jurisdiction for many Russian companies and financial institutions to establish holding company structures, joint venture vehicles, and offshore corporate entities. Given Russia's strong business connection to Cyprus, for many companies and financial institutions operating in Russia, the impact of the Eurozone crisis on Cyprus is of particular interest. This Mediterranean island nation joined the European Union in 2004 and adopted the euro as its official currency on January 1, 2008. As a result of the Eurozone financial crisis and inability to tap the international debt markets to finance its deficit, Cyprus has recently appealed to Russia for a €5 billion bailout, which only underscores the island's importance to the Russian economy.

While an assessment of the likelihood of and commercial risks arising from a possible Cyprus exit from the euro is outside the scope of this Commentary, Russian companies with Cypriot incorporated affiliates and transactions structured through Cypriot corporate entities should be taking practical steps now to understand and prepare for the risks from a possible escalation of the Eurozone crisis and a Cypriot euro exit, including the potential imposition of currency controls and the redenomination of currency from the euro ("Redenomination").

While the majority of questions and issues set out below may be equally applicable to most Eurozone jurisdictions, the Cypriot analysis needs to take into consideration that Cyprus only adopted the euro in 2008, has recent experience of working through redenomination issues, and until 2004 utilized exchange controls that had only limited effects on Cypriot entities held directly or indirectly by nonresidents.

Contractual Issues

  • Where and how are the payment obligations of the entity to be performed?
  • What is the currency of contractual performance? Euros? Dollars? Other?
  • If euros, how is the currency of the contract defined?
  • What is the governing law of the contract, and which courts and arbitration tribunals have jurisdiction?
  • What events of default are specified, and could they be modified by the principle of continuity of contracts, which would generally dictate that contractual provisions continue to be valid in spite of currency controls or a change in currency? What if such provisions are not included?
  • Can material adverse change or other termination clauses be relied upon as a pretext for restructuring or as a basis to otherwise improve the contractual position of the parties to the transaction in the event of implementation of currency controls or Redenomination? Or, will these provisions be trumped by force majeure clauses that might excuse a failure to perform by an affected party?
  • Is there a likelihood that under the governing law of a relevant contract, additional terms will be implied into it so as to facilitate the continuing efficacy of contractual obligations?

Corporate and Enforcement Issues

  • Would a Redenomination affect corporate capital structures?
  • Could euro or foreign currency contractual rights and obligations be redenominated into a local currency?
  • Could exchange controls be reimplemented, and what would their impact be?
  • Could exchange controls or the Redenomination affect the enforcement of foreign proceedings in Cyprus?
  • Will a foreign court give judgment in euro or other foreign currency in the event of Redenomination?

Sovereign Risk and Lex Monetae Issues

  • Is the sovereignty of a state over its own currency absolute? Can exchange controls be implemented?

Practical Funding, Hedging, and Treasury Issues

  • If exchange controls were to be implemented, what form are they likely to take?
  • If exchange or currency control laws had to be reintroduced in Cyprus, would they:
    "  affect payment obligations transiting through the local or offshore accounts of an entity incorporated in Cyprus?
    "  affect U.S. dollar payment obligations?
  • Will a Redenomination and currency or exchange controls have an impact on hedging contracts, margin arrangements, guarantee obligations, documentary credits, and custodian relationships?

Other Risks

  • Will the Eurozone crisis and any impact on contractual rights and obligations be used as a pretext for limiting exposure to Russia?

Steps to Understand and Mitigate the Risks

  • Have all contracts, assets, and liabilities that may be affected been identified?
  • Can termination provisions, indemnities, or any other contractual provisions be relied upon to exit relationships or accelerate payments from counterparties who may become a concern?
  • What opportunities can be identified to renegotiate contracts that may be affected?
  • Does it make sense to consider contingency plans? If so, what are the legal, timing, and other practical considerations?


Jones Day has significant experience in dealing with all aspects of sovereign defaults, currency redenomination, and the imposition of exchange controls, as well as the consequences of these actions in a wide range of corporate and financing transactions. We have deep experience in cross-border structured transactions involving Cyprus and Russia. With regard to the Eurozone crisis and transactions involving Cyprus, we are advising our clients to prepare and are assisting them with:

  • Analyzing their contractual relationships involving joint ventures or affiliated corporate entities organized in Cyprus and how they are documented to identify the exposures within them to payment obligations transiting through or to Cyprus or any other Eurozone member states.
  • Considering how contracts would operate in the event of redenomination of payment obligations or the imposition of foreign exchange or other currency controls.
  • Pursuing preemptive measures that might be taken now in order to limit the risk when it occurs—for example, amending contract terms to relocate the situs of the transaction, payment obligations, or payment currencies.
  • Implementing a contingency plan to consider those relationships that may become contentious or end up in dispute in the event of a Cypriot sovereign default or Eurozone departure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.