During the current crisis, the Russian Government and Central Bank have implemented a number of additional measures to support Russian banks and companies in their attempt to stave off the negative impact of the world financial slump and to reduce foreign debt. This state financing to banks and companies is offered through the Bank for Development and Foreign Economic Affairs (Vnesheconombank) and is based on the application of complex rules and methodology, which we attempt to demystify in this legal update.
The Russian authorities have recently introduced a series of legislative measures in order to stabilise the financial system and support banks which lack liquidity. A key element in the package of anti-crisis legislation is the Federal Law of the Russian Federation No. 173-FZ "On additional measures to support the financial system of Russian Federation" dated 13 October 2008 (the Law No. 173-FZ).
The provisions of Law No. 173-FZ are implemented through Vnesheconombank (also known as VEB), a state corporation which is charged with the task of masterminding the recovery of the Russian economy's competitiveness, its diversification and with stimulating new investments.
Below is an outline of two ways through which VEB will provide the financing under the Law No. 173-FZ.
Foreign currency loans to repay or service the foreign loans
First, the Central Bank of the Russian Federation (the Central Bank) has deposited $50 billion with VEB for one year (at a rate of LIBOR+1%) for the purpose of:
- granting emergency credits (at a rate of LIBOR+5%) to banks and corporates (the Borrowers) to enable them to repayment any foreign debt incurred prior to 25 September 2008; and
- purchasing from foreign creditors claims against Russian Borrowers under obligations taken on prior to 25 September 2008.
On 13 October 2008 the Supervisory Board of VEB approved the Procedure for implementing by VEB measures provided for under Articles 1 and 2 of the Law No. 173-FZ (the Foreign Currency Loans Procedure), which specifies how and to whom VEB can grant foreign currency loans.
VEB apply the following criteria when assessing Borrower refinancing applications:
- rejection of providing a financial support by VEB under a respective credit transaction between VEB and the applying bank (the Credit Transaction) would result in a threat to the economic security of Russia and potential loss of assets of the Borrower, which may entail a reduction in the Borrower's transactional activity or its bankruptcy (i.e. a complete termination of the Borrower's operations and redundancies);
- the Borrower's loan obligations to be refinanced (the Refinanced Obligations) were originally contracted to raise funds for major investment projects in Russia or to acquire assets for expanding the Borrower's activity in Russia; and
- the Borrower's major activity is carried out in the core ("real") sector of the Russian economy (i.e. industry, agriculture, defence, etc) and is of high importance to the economy, social stability, and socio-economic development of a region of Russia in which the Borrower is carrying out its activity.
In addition to the key criteria mentioned above, the Foreign Currency Loans Procedure also lists mandatory requirements the Borrower must fulfil:
- the Borrower's financial situation proves it can fulfil its prospective obligations under the Credit Transaction;
- the Credit Transaction can be carried out only if the Borrower co-finances at least 25% of the obligations to be refinanced, including using the funds of the Borrower's shareholders and the funds raised by the Borrower from its other sources;
- the Borrower shall apply to VEB for financing no later than 90 days before the maturity of the Refinanced Obligations;
- the Refinanced Obligations were contracted prior to 25 September 2008; and
- the Borrower has no outstanding federal and local tax liabilities.
Terms and conditions of the Credit Transaction
The Foreign Currency Loans Procedure also provides for the mandatory terms and conditions of the Credit Transaction, such as:
- the amount of the Refinanced Obligations should exceed $100 million, however the total amount of the Credit Transactions should not exceed $2.5 billion;
- the interest rate under the Credit Transaction will be LIBOR+5%;
- the security originally granted to the foreign creditors under the Refinanced Obligations should be assigned to VEB;
- the Borrower should pledge its rights to export contract receivables to VEB;
- the Borrower should grant to VEB the right to directly debit any of its (bank) accounts to secure repayment under the Credit Transaction;
- representatives of VEB should be appointed to the management body of the Borrower; and
- while the loan under the Credit Transaction is outstanding the Borrower should seek VEB's consent for any new loans, any amendments to existing loans and any transaction entailing disposal of assets exceeding 10% of the total value of its assets.
According to media reports, major Russian companies such as Rosneft, Gazprom, Lukoil, AFK-Sistema and others have expressed an interest in and applied for the foreign currency loans under Law No. 173-FZ.
Unsecured subordinated loans
Law 173-FZ also provides that VEB is to grant a series of unsecured subordinated loans (the Subordinated Loans) to Russian banks for a total amount of up to 225 billion Roubles (approx. $8 billion) using the funds of the National Wealth Fund which are deposited at VEB until the end of 2019.
The criteria and requirements VEB should employ when granting unsecured loans are described in the Procedure for implementing by VEB measures provided for under Articles 4 and 6 of Law No. 173-FZ (the Subordinated Loans Procedure) and approved on 13 October 2008 by the Supervisory Board of VEB.
Requirements for borrowing banks
A borrowing bank (the Bank) applying to VEB for financing should fulfil the following requirements:
- the Bank should have a long-term credit rating over the six months prior to the date of the borrower's application to VEB;
- the Bank primarily finances the core sector of the Russian economy, has a substantial volume of individual deposits and plays an important role in its region;
- the participation of Russian legal entities and/or individuals as ultimate beneficiaries in the Borrower’s charter capital shall be not less than 50 percent plus one share;
- the Bank has no outstanding federal and local tax liabilities;
- the Bank complies with Central Bank orders and has no sanctions imposed by the Central Bank; and
- the Bank demonstrates grounds for the necessity and urgency of credit extension, as well as specifying how it proposes to allocate funds.
Terms and conditions of Subordinated Loans
The Subordinated Loans Procedure lists in detail the terms and conditions of the Subordinated Loans to be granted by VEB to the Banks:
- the Subordinated Loan is granted in Roubles at an interest rate of 8% per annum for a term of at least 5 years expiring not later than at the end of 2019;
- the actual term of the Subordinated Loan shall be equal to the term of a respective deposit made by the National Wealth Fund into the VEB's account;
- the Subordinated Loan shall not exceed 15% of the Bank’s own equity, calculated as of 1 October 2008 and 100% of the funds raised by the Bank in total after 1 October 2008;
- the Borrower should get the Central Bank’s consent to include the subordinated deposit/credit from the third parties to the sources of additional capital; and
- any increases in the Bank’s charter capital due to funds received from third parties as equity investment in the Bank’s charter capital should be registered with the Central Bank.
The Subordinated Loans Procedure also lists a number of conditions precedent to receiving the Subordinated Loans from VEB.
The application procedure for both foreign currency loans and Subordinated Loans is quite similar. In both cases the borrower’s application is evaluated and determined by VEB, which considers how reasonable is its participation in the proposed financing. VEB conducts full scrutiny of the borrower's application, including the assessment of the borrower's financial situation. In addition, applications for foreign currency loans are also considered by the credit committee of VEB.