Throughout 2015, both external and internal factors had a considerable negative impact on the Russian economy. It is precisely in this context that amendments intended to modernize legislation to develop regulation of the domestic debt and capital markets should be considered. Also, the Bank of Russia actively influenced monetary policy using the methods available to it for increasing market liquidity and reviewed approaches to regulation of currency lending. Restrictive measures were also actively discussed in connection with unprecedented capital flight. However, to date no radical decisions have been made. Below is a brief overview of key new developments that stand out against the backdrop of other changes to banking and finance regulation in 2015.

Debt financing

Statutory interest at the Bank of Russia refinancing rate

Pursuant to the new Article 317.1 of the Civil Code of the Russian Federation (the Civil Code), the creditor under a monetary obligation between commercial entities by default is entitled to demand from the debtor interest for use of funds at the Bank of Russia refinancing rate.1 Previously (before this new article appeared), interest did not accrue unless the parties specifically agreed to this. Such an approach had created a favorable environment for non-payment, which unscrupulous counterparties often abused to get free funding. Unfortunately, ambiguous court practice is developing that for some unclear reason treats the new statutory interest as a sanction for breach of an obligation (Article 395 of the Civil Code).

Interest rate for default changed

From now on, Article 395 of the Civil Code provides that interest shall accrue for illegal use of another's funds at the average bank interest rates for retail deposits at the creditor's place of residence (location),2 and not at the Bank of Russia refinancing rate. This has now led to a drop in the amount of interest. However, if correctly interpreted, the total amount of interest recoverable for late payment should, on the contrary, go up thanks to the accruable statutory interest.

Compounding of interest now legal

On June 1, 2015 it became possible for business parties to agree in a contract to charge compound interest, or so-called "interest on interest." As before, a bank deposit agreement can also stipulate that interest is compounded.

Syndicated lending mechanisms being improved

Yet another step was taken in 2015 on the path toward improving legal infrastructure for syndicated loans. The law now allows the syndicate members to determine the procedure for amendment or termination by a majority vote of creditors. The members can also agree to the procedure for determining the "majority."

Moreover, last year the Association of Regional Banks of Russia completed work on the Standard Syndicated Loan Agreement3 for Russian-law syndications. The creation of such documentation can be considered a major achievement for the domestic market because it uses up-to-date concepts of civil law and was developed taking into account the opinions of a large number of experts, market participants and representatives of the legal community.

Bank of Russia abolishes special regulation of credit lines

In 2015, the Bank of Russia abolished Regulation No. 54-P4 which de jure defined various forms of credit transactions (starting with one-time credit transactions and ending with revolving credit lines). There is no clarity as to how this gap in the regulation will be filled. Possibly the regulator followed already existing business customs and the existence of varied court practice treating the specifics of using different forms of financing.

Green light for export factoring?

Ratification of the Convention on International Factoring

Russia's ratification on March 1, 2015 of the UNIDROIT Convention on International Factoring should be considered as a continuation of the course of harmonizing domestic factoring regulation rules with the provisions of the convention, a number of which have made their way into the Civil Code. It may well be that after ratifying this convention, lawmakers will return to the idea of amending Chapter 43 of the Civil Code (Financing with Assignment of a Monetary Claim) to make the terminology uniform. Presently, the Civil Code does not use the term "factoring" as such. The convention's ratification clearly creates additional incentives to develop international factoring.

Relaxation of currency restrictions applicable to factoring

One main problem faced by Russian exporters when structuring factoring transactions even before the convention was ratified were the requirements of currency laws, which limited assignment of claims under export contracts to third parties.

The relevant amendments were made to the Law on Currency Regulation5 and the Administrative Code to resolve this problem in factoring. Under new Article 19(5) of the Law on Currency Regulation, where a Russian exporter assigns a monetary claim under a foreign trade contract to a factor, the exporter will be deemed to have performed the obligation to repatriate currency revenue only if all of the criteria listed below are met at the same time:

(a) only a "currency resident" may be a factor;

(b) the claims must be assigned only after the goods are supplied, the services are provided or the work is performed; and

(c) the resident must ensure that funds are transferred to the factor's account in a Russian bank within the time limits set by the contract. Otherwise, it is precisely the resident who will face administrative sanctions (in the amount of 75-100% of the funds not credited).

Interestingly, the amendments adopted may on the whole negatively impact the possibility of assignment under foreign trade contracts of Russian residents. After all, having exceptions where a repatriation requirement has limited application confirms the general rule that it is not possible for a resident to assign its claims under a foreign trade contract because the repatriation requirement cannot be met other than in cases specifically provided by the Law on Currency Regulation.

Special considerations for currency transactions and reporting on them

Resident individuals must report cash flow on foreign accounts annually

In 2015, the RF Government outlined a procedure for filing reports of cash flow on accounts with foreign banks for resident individuals. Fortunately, the Government's procedure is not too burdensome. The general rule is that reports are filed annually (by June 1 of the next year). Moreover, reports may be filed either electronically (the tax authorities still have to develop the relevant mechanism based on the "taxpayer's online account" on the tax service's official website) or in the usual written form. As for the format of reports, by default, information is provided in the form of a table showing: (i) the balance of funds at the beginning of the reporting period, (ii) amounts credited and debited for the entire reporting period, and (iii) the balance of funds at the end of the period.

Nonetheless, as currency control agents, the tax authorities may request additional information on residents' currency operations. We cannot rule out the possible start of a campaign to scrutinize transactions of honest resident individuals who have already filed reports. If "illegal currency transactions" are found in a reporting period, residents risk administrative sanctions of up to 100% of any alleged "illegal currency transaction." Consequently, we would expect that no matter how simple or convenient the reporting procedure itself may be, residents at risk may seek loopholes to conceal information or avoid reporting altogether.

Residents can transfer income from securities transactions abroad to foreign accounts

Lawmakers continue to work on errors in removing obstacles to residents' transferring to their foreign accounts income which, at a minimum, seems illogical to transfer to Russian bank accounts. Readers will recall, as a general rule residents may transfer to their foreign accounts only funds from their own accounts (whether in Russia or abroad). It is comforting that the list of permitted currency transactions to credit funds to residents' foreign accounts continues to grow, providing new possibilities for payment structuring.

In 2014, the most frequently used currency transactions of residents (including crediting interest on deposits, crediting salary from nonresident employers, etc.) got onto the list. The 2015 changes make it possible to credit funds payable to a resident individual as income earned on funds / securities transferred to a nonresident fiduciary (but note – not the principal itself). Starting January 1, 2018 resident individuals may also credit income earned from selling securities placed on a Russian or some foreign stock exchanges.

However, from now on, the Law on Currency Regulation makes it impossible to credit grants to residents' accounts with nonresident banks.

Bank of Russia stops making passports for transactions under which all settlements are made via residents' foreign accounts

The Bank of Russia has adjusted the procedure for executing currency transaction documentation. In particular, the Bank of Russia through its local subdivisions has removed itself from the process of supervising currency transactions under foreign trade contracts (credit agreements) of residents if all settlements are made via such residents' foreign accounts.

Now those authorities, including authority to make transaction passports for such contracts, have been assigned to the Russian banks at which the resident has settlement accounts. These changes will considerably simplify the procedure for such currency transactions, because the resident will deal directly with its servicing bank and will not enter into a highly formalized exchange of documents with subdivisions of the Bank of Russia.

Attention: loans to nonresidents may be subject to repatriation

In practice, disputes occasionally arise regarding the applicability of repatriation requirements to transactions in which residents lend nonresidents money. Law enforcement authorities in Russia often treat loan relationships as provision of financial services. Such interpretation enables them to apply to resident lenders a requirement to return loans provided to nonresidents to their accounts with authorized banks.

Unfortunately, on the wave of countering capital flight from Russia, such a position may be adopted at the legislative level. Such a draft law has already been developed6 and is currently being considered by the State Duma in the first reading.

Alignment with the key rate

As we know, with the goal of improving methods of regulating monetary policy, in the fall of 2013 the Bank of Russia introduced a new indicator, the key rate. This is the interest rate at which the Bank of Russia provides and withdraws liquidity on an auction basis for up to seven days. With the introduction of the key rate mechanism, the refinancing rate (previously used as the Bank of Russia's main tool for influencing short-term transactions) has become secondary. Thus, having fixed the refinancing rate at 8.25%, in recent years the Bank of Russia has updated only the key rate. Since August 3, 2015 the key rate has been equal to 11%.

As of January 1, 2016 the Bank of Russia will no longer set a separate refinancing rate, and the refinancing rate will be equal to the key rate.7 In practice, this means that the effective interest rate applicable for calculating penalties and fines under the tax, civil, labor, land, housing, water and budgetary codes, and the administrative offenses code, insurance and banking legislation, which all continue to refer expressly to the refinancing rate, will increase.

News from the securities market

Regulation of repo transactions and derivatives transactions

The rules on repo transactions and derivatives transactions concluded under master agreements have undergone certain changes. For example, the Law on the Securities Market8 provides from now on for the possibility of concluding, as part of a master agreement, contracts for one of the parties to the contract to transfer to the other party securities and/or money to secure the performance of obligations arising from the contracts concluded on the terms and conditions of the master agreement. These are the security transactions whose status used to be unclear. Transactions under a Credit Support Annex in transactions made on the basis of ISDA documentation, for example, are considered such transactions.

Forex trading under supervision: license required

The so-called Law on the Forex Market,9 all of whose provisions finally entered into force on January 1, 2016, has for the first time established regulatory requirements to the activities of forex dealers. The fact that the forex market needed regulation was discussed many times before the law was adopted and entered into force. Now, this type of activity has become licensed. All participants must furthermore join a self-regulating organization (SRO).

The law is favorably viewed from the perspective of additional guarantees for individuals as non-professional participants of the forex market. However, the new regulatory requirements create obstacles for new participants to enter the market. At present, many forex dealers act through their foreign affiliates. This is formally strictly prohibited by the Law on the Forex Market.10 In addition, the process of obtaining the appropriate licenses will no doubt take some time. It will be interesting to watch how the regulator and market players—most of whom are not yet licensed—will find a compromise.

Repositories to obtain licenses

Amendments have been approved11 considerably expanding the regulation of repository activity, which will become licensable as of June 28, 2016. The rules on providing a repository with information about master agreements and transactions concluded under such agreements have been changed. In particular, it is no longer possible to provide information to the repository on a quarterly basis.

Representative offices of foreign professional participants must now get Bank of Russia accreditation

According to the new Article 9.1 of the Law on the Securities Market, unless otherwise provided by law, a representative office of a foreign organization engaging in regulated activity on financial markets in accordance with its governing law, except a representative office of a foreign credit institution, may engage in activity within the RF from the date of its accreditation by the Bank of Russia. The Bank of Russia has published a draft regulation on the accreditation procedure. However, at the date of this publication such draft regulation had not yet been officially adopted.

Other changes important for regulation of the securities market

In addition:

(a) the requirements for professional securities market participants have been expanded and updated, including for internal control and audit;

(b) new grounds and a procedure for cancelling / suspending a professional securities market participant's license have been established;

(c) the procedure for state registration of a share issue has been changed; and

(d) the regulation of pledge of uncertificated securities has been systematized.12

New ways to secure obligations

Major amendments have been made to the section of the Civil Code devoted to obligations and contracts. The amendments entered into force June 1, 2015. Amongst those amendments affecting security, we highlight the following:

(a) third parties to whom part of a creditor's rights have passed (for example, sureties) cannot exercise those rights to the detriment of the creditor and have priority over the creditor (Article 313 of the Civil Code);

(b) it is now possible to secure non-monetary obligations; and

(c) if the underlying secured obligation is invalid, return of that received under the invalid obligation continues to be secured (Article 329 of the Civil Code).

Below we consider in more detail the amendments affecting certain types of security.

New means of security

The Civil Code has provided legislative regulation of the use of the security deposit (Articles 329, 381.1 and 381.2 of the Civil Code), which has been actively used on the real estate market. This makes it possible to use a security deposit more widely. For example, this instrument can now be used to secure obligations under derivative financial instruments in the form of cash or securities (or fungible things). Such a possibility was also set forth in Article 51.5 of the Law on the Securities Market. The appearance of this instrument has reduced the risks associated with Russian residents using such contractual structures of English law as the Credit Support Agreement (CSA). Unfortunately, some issues of using securities (or fungible things) for these purposes require further clarification from the Bank of Russia.

A new security instrument called an "independent guarantee" has appeared. This is similar to a bank guarantee with the only difference being that not only a bank or other credit institution may provide such guarantee, but also any other type of commercial entity. In other respects the independent guarantee is regulated by the rules applicable to bank guarantees. This marks a major step forward in credit support, since previously non-banks could only provide suretyships, whose validity depended on the validity of the underlying secured obligation (e.g., the loan being secured).

New ways of using old forms of security

The most substantial amendments have been made to the section of the Civil Code devoted to suretyships and guarantees. Among them we would like to highlight the following amendments concerning suretyships.

(a) It is now possible to establish a security by operation of law. Although such a structure is not currently popular, it may turn out to be useful, particularly in the realm of state procurement (Article 361(2) of the Civil Code).

(b) In the future it will be possible to refrain from describing secured obligations in detail; it will be enough to cite (cross-reference) the contract in which the obligations arose (Article 361(3) of the Civil Code).

(c) Russian law has now enshrined an institution similar to the English-law structure known as the all monies guarantee, which makes it possible to perform all existing and/or future obligations of a debtor.All obligations can be secured only if: (1) the surety engages in business; and (2) the amount of the secured obligations is limited (Article 361(3) of the Civil Code).

(d) If collateral which existed when the suretyship was granted is lost through the creditor's fault, the amount of the suretyship will be decreased to the extent to which the surety could demand compensation from the lost collateral. The agreement with a surety engaging in business may provide for an exception to this rule (Article 363(4) of the Civil Code).

A number of amendments made to the rules on suretyships touch also on the regulation of pledge relationships where the pledgor is a third party and not the debtor. These concern primarily the following:

(a) a rule is established under which neither the surety nor the third party pledgor, having obtained the rights of co-pledgee, can in any way satisfy their claims against the debtor from the value of the pledged property until the creditor's claims under the underlying obligation have been fully settled (Article 364(4) of the Civil Code);

(b) the law has provided an absolute prohibition on restricting the right of a surety or third-party pledgor to raise defenses of the debtor (Article 364(5) of the Civil Code);

(c) the Civil Code (Article 367) now reflects the position of the RF Supreme Commercial Court that: (1) the suretyship is preserved in the previous scope when the underlying obligation changes without the surety's consent; (2) the surety may give advance consent to change the underlying obligation within certain limits. A similar rule applies to a pledge provided by third parties as well.

The change on which we would focus for the bank guarantee, which has now become only one example of an "independent guarantee," is that now the principal does not have to be a debtor of the beneficiary (Article 368(1) of the Civil Code). In a situation where the guarantor may rely only on the principal's creditworthiness when evaluating its credit risks the identity of the principal is of considerable importance. In a situation where, in complicated financial transactions, the borrower is often a company of a group specially created for those purposes (which implies that it does not have substantial assets), the risk of the company not repaying the guarantor the amounts paid under the guarantee is quite high. So the market has positively responded to this change. However, upon closer examination of the amendments that have affected the independent guarantee, doubt arises as to whether lawmakers indeed intended such a change. Note, for example, subclauses 3 and 4 of Article 376(2) of the Civil Code. Most likely these exceptions relate only to a situation allowing the guarantor to suspend a payment under a guarantee. We can still hope that the Supreme Court or lawmakers will clarify this issue in the near future.

New provisions on pledge

On January 1, 2015 a new provision on pledge entered into force allowing a pledgor to pledge all of its property, under Article 339(2) of the Civil Code.

Securing the consequences of a transaction's invalidity

An important amendment was made to Article 329(3) of the Civil Code. Under that article, security does not terminate when an underlying obligation is invalidated; rather, the security secures the obligations associated with the consequences of such invalidity. This rule enshrines the conclusions made earlier by the Plenum of the RF Supreme Commercial Court about the suretyship13 and extends them to all other types of security.

Supreme Court: the invalidity of performance of a secured obligation does not automatically reinstate the security

Notably, invalidation of performance under a secured obligation can have considerable importance for the fate of its security.

Recently, the Supreme Court considered such a case.14 Pledges and suretyships had been issued to secure the performance of a borrower's loan obligations to its bank. The borrower had performed the loan obligations; the bank then concluded agreements with the sureties terminating the suretyships and discharged all pledge records. The third-party pledgor then pledged the released property to another bank.

One month after the loan settlement, however, the borrower filed for voluntary bankruptcy. Performance of the loan was declared invalid during the bankruptcy proceedings (as a preference). The Borrower's obligations under the loan were thus reinstated under the provisions of the Bankruptcy Law.15

The lower courts ruled that suretyships and pledges are reinstated together with reinstatement of the underlying obligation. However, the Supreme Court took another position: the security is not subject to reinstatement. Thus, the bank was included in the register of the Borrower's creditors but lost all its security in the process.

This case demonstrates the possibility of real abuse by borrowers and third-party security providers. It deserves careful attention when structuring and drafting security arrangements.


11. Since August 3, 2015 the key rate to which the refinancing rate is equated has been 11%.

2. On January 25, 2016 the rate for the Central Federal District was set at 7.94%.


4. Regulation No. 54-P on the Procedure for the Provision (Placement) by Credit Institutions of Funds and Their Repayment of August 31, 1998.

5. Federal Law No. 173-FZ on Currency Regulation and Currency Control of December 10, 2003.

6. Federal draft law No. 888029-6.

7. Bank of Russia Instruction No. 3894-U on the Refinancing Rate of the Bank of Russia and the Key Rate of the Bank of Russia of December 11, 2015.

8. Federal Law No. 39-FZ on the Securities Market of April 22, 1996.

9. Federal Law No. 460-FZ on Amendments to Certain Legislative Acts of the Russian Federation of December 29, 2014.


11. Federal Law No. 430-FZ on Amendments to the Federal Law On the Securities Market and Certain Legislative Acts of the Russian Federation of December 30, 2015.

12. Federal Law No. 210-FZ on Amendments to Certain Legislative Acts of the Russian Federation and Repeal of Certain Provisions of Legislative Acts of the Russian Federation of June 29, 2015.

13. RF Supreme Commercial Court Plenum Resolution No. 42 on Certain Issues of Resolving Disputes Related to the Suretyship of July 12, 2012.

14. RF Supreme Court Ruling No. 80-KG15-18.

15. Federal Law No. 127-FZ on Insolvency (Bankruptcy) of October 26, 2002.

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