For better or worse, we live in an increasingly globalised world. And in the lifetime of many businesses, there comes a time when they need to expand into new markets in foreign lands. Rather than taking the well-trodden road of investing in developed countries, some have ventured into emerging markets.

In a series of articles, we attempt to demystify certain legal aspects of investing and doing business in such countries and offer qualified encouragement for businesses thinking about paving the way. In this first article of the series, we will touch upon the taking of security over real estate in some of the largest economies of the Commonwealth of Independent States (CIS), namely Russia, Ukraine, Kazakhstan and Azerbaijan.

Secured transactions

Owing to their common Soviet heritage, the legal systems of the CIS countries bear certain similarities in the area of secured transactions, in terms of the legal aspects of taking, perfecting and enforcing security. Since secured loans in these countries often include real estate as a key element of the security package, whether loans are granted for general corporate purposes, specific projects (eg commercial real estate and infrastructure) or otherwise, we focus our attention below on immovable property as collateral.

Since the break-up of the Soviet Union, secured transactions have become an important part of the law and economy of CIS countries, as state housing funds have largely been privatised and the overall volume of lending has dramatically increased. Allowing lenders to create a security interest in collateral owned by an obligor or a third party security provider, coupled with a centralised registry of rights over immovable property and relatively effective enforcement mechanisms, has provided lenders with greater remedies in case of a default by the obligor.

Taking security

In general terms, security agreements are regarded in the CIS countries as legal devices by which a pledgor (often but not always the borrower) pledges to a pledgee (usually the lender) assets and/or rights which it owns, to secure the performance of an obligation arising out of a loan or other agreement. A security agreement is typically a written document which is an accessory to the loan (or other agreement which obligations are secured by such security). Agreements creating a security interest over immovable property typically must be publicly registered (and sometimes also notarised). As a rule, the pledgor retains the legal title to, and is entitled to occupy and/or use, the assets and/or rights, unless and until the pledgor fails to perform the secured obligations.

In addition to a mortgage over real property, various types of security are also available and commonly used by foreign lenders to complement the security package in commercial real estate financings in CIS countries.

These include a pledge over movables or rights (e.g., receivables, construction contract(s), performance bond(s), insurance and/or re-insurance policies, etc.), a pledge of shares in the borrower and/or holding company(ies) (eg for purposes of obtaining control in an event of default), suretyships, pledges of bank account rights, assignments of key contractual relations, standby letters of credit, etc.

There are also no general prohibitions or limitations on taking security over immovable property, except for certain restrictions related to foreigners' ownership or ability to mortgage land generally or those based on location of or designation of said land (eg border areas, agricultural land, etc.), as well as additional conditions related to mortgaging unfinished construction of real estate.

CIS countries generally are so-called 'race' jurisdictions, ie where the priority of mortgage claims are determined based on the time of registration in the relevant register (the earlier the registration, the higher the priority).

Cross-border lending; Foreign exchange control

While general banking activities are regulated, generally foreign lenders do not need a licence to lend into these countries, including if secured by local real estate or denominated in foreign currency.

There are generally no statutorily-prescribed loan forms, though each country is likely to have certain elements that must be included in the loan. Similarly, the absence of local-law usury rules, which might affect the terms of cross-border commercial loans generally, allows for greater flexibility for lenders, subject to local versions of thin-capitalisation rules.

Foreclosure and enforcement

Both judicial and non-judicial enforcement of security are possible in these CIS countries.

Judicial enforcement involves a number of steps, including initiating court proceedings, sale of the collateral at the public auction and statutory distribution of proceeds. Each of these steps has its own content, filing and timing requirements. Judicial enforcement is generally a lengthy process and may take anywhere from several months to several years to complete. This is one of its main disadvantages. Others include a sale by public auction under the supervision of bailiffs, which requires a statutory distribution of the proceeds.

Non-judicial enforcement (or so-called 'self help'), where legally available, also requires compliance with the prescribed statutory steps, including a possible appeal of non-judicial enforcement by the security provider in court.

Therefore, the most important advantage of this method, ie avoidance of the involvement of the local courts, can easily be eliminated by such an appeal.

Country survey

Dentons hopes that this short summary has been helpful in framing some of the main issues in cross-border secured lending.

A far more detailed version of this article, focusing on each of Russia, Ukraine, Kazakhstan and Azerbaijan, is available on Dentons' website, in our Country Survey. The Country Survey represents an in-depth analysis of these and other salient rules (including tax and insolvency), which we have tried to put into plain, user-friendly language for bankers and in-house counsel in our key strategic client organisations. The Country Survey can be accessed here.

Dentons Rodyk acknowledges and thanks the Dentons CIS Banking and Finance team who had compiled the Country Survey.

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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.