There’s been intense media coverage both at home and abroad about the 400 billion ruble (roughly 40 billion yuan) loan China has agreed to provide Russia for the Moscow-Kazan high speed railway project without requiring the sovereign guarantee of Russia. If It is agreed that no sovereign guarantee is required from Russian side, for such a high-profile project, we suppose there have to be other alternative measures to protect the rights and interests of Chinese borrowers and investors. This case illustrates to some extent increasing attention to the sovereign guarantee. This article, however, focuses mainly on the newly amended Russian Budget Code [1], and presents an overview of the Russian sovereign guarantee system to give a reference point for Chinese enterprises looking to invest or do financing in Russia.

Overview of the legal system of Russian Sovereign Guarantee

The early Russian sovereign guarantee system was established by their federal administration [2] in 1997. This system involved the Russian federal government giving a sovereign guarantee for selected projects using a Russian Federation Development Fund. In 1998, Russia issued the Federal Budget Code (the “Budget Code”) [3] which covered federal government sovereign guarantees and sub-sovereign guarantees [4] from government of federal subjects and autonomous regions. Combined with relevant administrative regulations, the Budget Code, and the approved relevant level government’s annual budget which contains the planned sovereign guarantees, collectively form a prototype for the basic law of the Russian sovereign guarantees. According to the prevailing Budget Code, sovereign guarantees are for special projects involving the Russian federation, Russian federal subject, or autonomous regions where, when necessary, the guarantor will undertake financial responsibilities in accordance with a proper government budget.

In summary, current Russian sovereign guarantee legal system consists of the Budget Code, a government budget, rules and regulations of the federal and local governments, and applicable civil and commercial law. As the basic law for Russian government branches and government debt, the Budget Code sets out specific rules and principles for sovereign guarantees covering important factors such as the responsible organs, currency, annual planning, the approval process, scope of liability and so forth.

The government budget is subject to approval from the legislative body after it has been submitted along with a plan of sovereign guarantee as an accessory. The plan of sovereign guarantee is divided into program of sovereign guarantee in domestic currency and program of sovereign guarantee in foreign currency, which contains various kinds of sovereign guarantee. The guaranteed person, credit cover, right of recourse and guarantee conditions might vary depending on the specific categories of sovereign guarantee.

The rules and regulations of federal and local government[5]govern operations including the requirements of projects, qualifications of participants, departmental approvals, competent authorities, the application and approval process, scope and expiration date of liability and execution procedure.

Further, since the enactment of the Budget Code there have been a series of court cases, at all levels, on sovereign guarantees, on the basis of which the Supreme Court of the Russian Federation has issued Explanations on Several Issues of the Budget Code That Apply to Arbitration Courts aiming to explain the law and its application to help dispute resolution in judicial practice.

Categories of Russian Sovereign Guarantee

As an accessory to the government budget, the annual plan of sovereign guarantees differentiates between sovereign guarantees of domestic and foreign currency. The plan sets out project categories. For instance, the 2016 annual plan divided sovereign guarantees into 10 categories including ordinary investment projects, preferential loan investment projects, the North Caucasus federal investment projects, tourism development projects of certain areas, national defense industrial plan projects, national defense purchasing projects and another 4 special projects relating to specific guaranteed persons.

Sovereign guarantee projects available to Chinese investors or financial institutions are mainly ordinary investment and preferential loan investment projects. The former are projects in accordance with Federal Governmental Order No. 1016 [6] of the Regulations of Selected Projects and Guaranteed Persons that are significant to the federation and contribute to Russian economic and social strategic development. Preferential loan investment projects refer to projects financed by Vnesheconombank or other accreditated banks and international financial organization under Federal Governmental Order No. 1044 [7] of the Support Plan on Domestic Investments under Project Finance Model, which will be refinanced by Central Bank of Russia at low interest.

Sovereign guarantee can be further subcategorized into sovereign guarantees from the Russian federal government, and sub-sovereign guarantees provided by federal subjects of Russia and autonomous regional government. Unless otherwise stated, this article mainly discusses sovereign guarantees from the Russian federal government.

Qualification of Guaranteed Persons and Creditors

The Budget Code that came into effect on Feb. 25, 2016 [8] specifically prohibits foreign entities from being a guaranteed person and creditor under sovereign or sub-sovereign guarantees. It also rules out companies where offshore companies hold more than 50 percent of the shares. The newly revised Budget Code applies to the 2017 annual plans of the sovereign and sub-sovereign guarantees of all level of governments.

The Code doesn’t specifically define “offshore company”. The general interpretation is that it means companies registered in countries and areas listed in the List of Offshore Territories [9]. The requirements on offshore companies are recently promulgated, thus the Russian legislative body and judicial authority might publish further details and explanations in due course. Worthy of note is that Russian companies established through agencies in Hong Kong are also eliminated according to the List.

Even though regulations in the Code on sovereign and sub-sovereign guarantees apply to the budgets all level of government, according to the financial budget approved by the Russian Duma and Federal Committee, Documents No. 1016 and 1044, the guaranteed persons of ordinary investment and preferential loan investment projects are limited to Russian entities. Creditors of ordinary investment projects are confined to Vnesheconombank and Russian financial institutions and very few Russian and international financial institutions which are approved according to Document No. 1044 as well as Vnesheconombank are entitled to serve a loan for the preferential loan investment projects.[10]

Duration of Guaranty

A sovereign guarantee is a type of government debt. According to the Code, Russian government debt can last as long as 30 years with administrative rules covering other details. For example, Document 1017[11] No. 11 stipulates that the length of guarantee of ordinary investment projects shall be 90 days after expiry of the project or loan but the project or loan or guarantee can’t exceed a limit of 20 years.

Nature of Guaranteed Liability

According to the Budget Code, the Russian federal government is entitled to stipulate joint and several liability and complement liability in specific sovereign guarantee, and the relevant administrative laws has expressly provided the nature of most of the sovereign guarantees. For instance, Document No. 1016 stipulates that the Russian government only undertakes complement responsibilities for ordinary investment projects. Therefore when defining the nature of sovereign guarantee, it should be noted if relevant administrative rules have set-out restrictions.

Obligations and Scope of Sovereign Guarantee

According to the Budget Code, the sovereign guarantee of the Russian federation can guarantee the performance of a guaranteed person as well as compensate for losses when stated situations occur.

The scope of sovereign guarantee usually includes the principle creditor’s rights and interests. It should be noted that the scope might vary depending on the administrative rules in effect. For example Document No. 1017 requires that the scope of liability of the guarantor includes the principle creditor’s rights and interests while Document No.1044 only covers the former.

Calling up a Sovereign Guarantee.

Administrative rules usually provide the general process for calling up a sovereign guarantee. Take the sovereign guarantee of an ordinary investment, according to Document No. 1017, creditors should immediately claim their right when there’s a breach of contract by the guaranteed person. Once the guaranteed person has been notified by the creditor, and the former refuses to comply, the creditor is entitled to notify Vnesheconombank within the period stipulated by the guarantee contract and letter of guarantee along with the supporting documents demanding that the Ministry of Finance on behalf of the Government of Russian carries out the responsibilities. The Russian government reserves the right to claim compensation from the guaranteed person.

The Approval Process of Issuance of Sovereign Garantee

As set out in the 2016 annual governmental budget, most types of sovereign guarantee are directed toward special regions and industries, national defense enterprises, or to support Russian commodities, projects and export services. To Chinese investors, ordinary investment and preferential loan investment projects might be the most commonly encountered with the latter having special restrictions on project financing structure and the borrower. As such, this article takes the ordinary investment projects for instance to briefly introduce the approval procedure of issuance of sovereign guarantee.

1. Project Application Conditions

Document No. 1016 covers three types of ordinary investment projects, for example projects that improve the energy efficiency of public spaces or industry. If investors wish to participate in any of these, the project needs to meet the following requirements:


Projects that improve energy efficiency of public space

Projects that improve industrial energy efficiency

Other projects

Project requirements

(1)total project investment should be no less than 500 million ruble;

(2)equity ratios of national-owned capital in project company should be no more than 49%;

(3)80% reduction of total investment capital should be obtained within 7 years by saving energy

(4)energy consumption per unit should be reduced no less than 15% upon energy consumption check;

(5)Renovate or (and) modernize, or replace existing infrastructure with environmental-friendly facilities.

(1)total project investment should be no less than 1 billion ruble;

(2) equity ratio of state-owned capital in the project company should be no more than 49%;

(3) 50% reduction of total investment capital should be obtained within 5 years by saving energy

(4) energy consumption per unit should be reduced at least 10% upon energy consumption check;

(5)Renovate or modernize assembly lines that were put into use within 1 year prior to application. A focus on restructuring capital of project companies through investments. Book value of investment should account for no less than 1% of total assets in the latest fiscal year or no less than 5% of fixed assets.

(6) Project company should not manufacture tobacco and alcohol products.

Total project investment should be no less than 5 billion ruble (or no less than 175 million USD)

Capital at the disposal

Investment ratio

Project company’s equity capital should be no more than 20% of total project investment.

National support

Capital ratios

Various national support assets (including sovereign guarantee) should be no more than 75% of total project investment.

Guarantee ratios

The amount of sovereign guarantee should be no more than 50% of total project investment.

Project company

(1)Project company is Russian legal person;

(2)Shareholders with over 10% share, the management crew and contractors should have successful experience in similar projects;

(3)Project company’s shareholders should ensure that requirements are met regarding the safeguard measures of investment profits and its target economic development index

(4)Project company and its shareholders do not have outstanding debt to the Russian federal government;

(5) project company has no history of filing bankruptcy proceedings;

(6)Project company has supporting documents issued by other investors and (or) financing agencies to attest that other investors and (or) financing agencies undertake investments that are not covered by the sovereign guarantee.

2. The approving authority and process

In general, the approval process for sovereign guarantees comprises a project approval and a guarantee approval. Led by the Russian Ministry of Economic Development, the Inter-ministerial Committee for Examination and Approval of Ordinary Investment Projects (“IMC”) is the authority which examines and approves the project for which shall be issued Federal government sovereign guarantees based on the approval opinion given by competent authority of relevant industry. IMC examines and approves the project itself and the guarantor who has applied for the sovereign guarantee. The Federal governmental agency designated by the Ministry of Finance (Vnesheconombank this year) taking into account the guarantors’ financial status and credit records and is responsible for signing up the sovereign guarantee contract on behalf of the Federal government or issuing a letter of guarantee. Relevant procedures can be found mainly in Documents No. 1016 and 1017, which continue to be applicable to approval of ordinary investment projects this year

Project companies which comply with Document No. 1016 are eligible to apply for examination and approval for ordinary investment projects listed. IMC will examine and approve these projects and guarantor applicants in accordance with Document No. 1016. Opinions, letters of support, evaluation reports and other documents from the project management authority, financing agencies and financial consultant are integral to the final decision of IMC.

Upon completion of the approval process, IMC will submit the decision to the Ministry of Finance and launch its sub-phase, e.g. guarantee approval guided by Document No. 1017. Based on this, the Ministry will submit a draft decision on the sovereign guarantee to Russia’s Federal government for official enactment. Vnesheconombank will evaluate the financial status and credit record of the guarantee, negotiate with them the contract or letter of guarantee and issue an opinion on the feasibility of fulfillment of the contract, based on which the Ministry of Finance will finalize the guarantee contract and sign up with creditors in the name of Russia’s federal government and issue a written letter of guarantee.

See the chart below for the 2016 approval process for ordinary investment projects:

Click here to view the image.


Russia tends to be prudent in providing sovereign guarantees to foreign entities. The newly revised Budget Code incorporates extensive limitations to guarantors and creditors of sovereign guaranteed projects and prohibits foreign entities as guarantors or creditors of Russia’s federal sovereign guarantees. This makes obtaining a sovereign guarantee more difficult. Against the background of the China-Russia strategic cooperation and One Belt One Road, Chinese enterprises and financing agencies should strive harder to enhance their financial capabilities and the risk management of projects rather than rely on a Russian sovereign guarantee to maximize return on investment. On the other hand, it is recommended to design structures for trade and financing with the advance knowledge of the Russian sovereign guarantee system to safeguard cross-border investment and financing security for those projects which can be guaranteed, particularly large-scale investment projects.

Editors note: This article was simultaneously published on