Capital markets and structured investments

There are restrictions on issuing debt securities in Russia which differ for Russian and foreign securities.

For Russian debt securities issued by Russian issuers, the general regulation for securities offerings must apply with special requirements established for each type of debt securities (bonds, depository receipts and etc.).

Foreign financial instruments may only be placed (sold for a first time to the first holder) in Russia if the following conditions are met:

• an international securities identification number (ICIN) and a Classification of Financial Instruments (CFI) are assigned to the instrument; and
• the instrument is qualified as security in accordance with the procedure established by the CBR,

provided that in each case the financial instrument is issued by a foreign issuer that complies with the requirements stated in the law (such as foreign organizations established in states that are members of the Organization for Economic Cooperation and Development (OECD), foreign organizations established in states whose relevant regulators (other authorized institutions) have entered into cooperation agreements with the CBR, and foreign organizations whose securities are listed on foreign exchanges included in the special list approved by the CBR).

Generally, in addition to the conditions set out above, foreign securities will be admitted for placement (initial sale to initial investors) in Russia provided that the prospectus describing such securities is registered by the CBR and such securities are registered with (held through) a depositary established in accordance with Russian law. A filing of a notice to the CBR with the results of the initial placement in the Russian territory and disclosure of this information are required, without which any subsequent trading/transacting in Russia is prohibited.

In certain cases, a decision to admit foreign securities to public circulation in Russia may be made by the Russian exchange if a listing procedure is started or finished by the foreign exchange and which is included in the list specified by the CBR.

It should be noted that Russian regulation of the securities market is rather conservative. Russian issuers can only issue the types of securities that are directly specified in the law and in accordance with the requirements stated in the law.

The most common types of Russian debt securities are bonds issued on a stand-alone basis. Recently, it also became possible to issue bonds under a program.

The various types of Russian debt securities include:

• bonds characterized by the type of interest or payment such as fixed-rate bonds, floating-rate bonds and discount bonds;
• secured bonds such as bonds secured by the pledge, bonds secured by surety and bonds secured by bank or state guarantee;
• subordinated bonds and perpetual bonds (ie bonds that have no specified redemption date);
• exchange-traded bonds;
• commercial bonds;
• structural bonds;
• Russian depository receipts (securities issued by a Russian depository evidencing the right of its holder to a certain amount of securities of a foreign issuer);
• warrants (securities giving its holder the option to purchase equity of the issuer under the terms specified in it); and
• convertible securities (securities convertible into other types of securities such as shares or bonds).

Foreign financial instruments can only be admitted to public placement/circulation if, among other requirements, they are qualified as securities under the procedure established by the Central Bank of the Russian Federation (CBR). Thus, the types of such securities are limited to those recognized by the CBR.

In some cases, securities can only be offered to qualified investors. Such offerings are possible without a prospectus and disclosure of information (but it is still required for listing by an exchange).

Securities for qualified investors can only be acquired or sold through a broker in some cases.

Under Russian law, a prospectus must be prepared in all cases, unless one of the following exemptions apply:

• securities are placed with qualified investors or the persons that can exercise a preemptive right in respect of such shares or securities (convertible into shares);
• shares or securities convertible into shares are placed with persons that, as on a certain date, are or were shareholders of the issuer;
• securities are offered to a maximum of 150 persons (qualified investors and persons that can excercise a preemptive right in respect of such securities not counted);
• funds raised by the securities offerings during a year do not exceed RUB 4 billion for a credit organization or RUB 1 billion for all other issuers;
• funds paid by each potential purchaser (apart from the persons exercising their preemptive right) are not less than RUB 1 million 400 thousand ; or
• registration of separate terms and conditions of bonds under a program where a prospectus has been registered simultaneously with registration of the program within one year from the date of registration of the prospectus.

The Moscow Exchange has two principle markets on which debt securities are traded subject to its rules:

• the Equity Capital Market which offers trading in shares, depository receipts, fund shares, mortgage participation certificates and exchange traded funds; and
• the Debt Capital Market which offers trading in state bonds, corporate bonds, and corporate and sovereign Eurobonds.

Another active exchange in Russia is the Saint-Petersburg Exchange where shares, options and commodities are traded. It is notable that, for the first time on the Russian market, the Saint-Petersburg Exchange has introduced an opportunity to trade foreign securities within the Russian jurisdiction.

Russia has a moderately active private placement market.

As a matter of Russian law, securities cannot be placed (including private placements through private offering to specified potential buyers) until:

• the securities offering and (in relevant cases) the prospectus are registered with the Central Bank of the Russian Federation; or
• issuing of the securities (at the time of incorporation of the issuer or through private offering) is registered by a licensed registrar,  an exchange or a depository.

Generally, it should be noted that issuing or investing in securities in emerging markets such as the Russian Federation is subject to greater economic, political and legal risks when compared with more mature markets.

Potential legal risks are connected with the fact that regulation of the securities market in Russia is rather new and undeveloped in some spheres. The relevant laws tend to change rapidly and their practical implementation may be inconsistent or unclear. Some important areas of the securities market are not regulated in Russia, while in other areas the law imposes obligations on the Russian issuers which are not common in other markets. The approach of the Russian regulator and interpretations of the applicable legislation are unstable, not well developed and, at times, can be unpredictable and selective.

Issuing debt securities

Failure to comply with the stated requirements of proper information disclosure including misleading statements in, or omissions from, a prospectus can lead to civil, administrative or criminal liability. Federal Law 'On Protection of Rights and Legitimate Interest of Investors on Securities Market' provides various measures for the protection of investors.

Investing in debt securities

The concept of a bonds trustee (which is not a trustee in common law terms but a representative that acts on behalf of, and in the interests of, the bond holders) was recently introduced to the Russian securities market. The law provides the bonds trustee with significant discretion, while being in some parts vague and not widely tested in practice. Some bonds trustees on the market may interpret the law differently leading to uncertainty among investors.

The law also introduced a concept of investors meetings which consider matters affecting the investors interests. The decision of any such meeting is binding upon all investors including investors who did not attend and vote at the relevant meeting and investors who voted against the decision.

Federal Law 'On Advertising' sets requirements for the advertising (that is, the distribution of information addressed to the general public and intended to draw attention to an object of advertising, to form or keep up an interest to it or to market it in any form) of financial services or financial activities of a fund or the advertising of securities, such as a prohibition on the inclusion of information about the assets management that is not supported with documentary evidence, as well as the guarantees of future stability and / or profitability of the investments, unless it can be clearly defined at the time of agreement for using such financial services.

Russian law also prohibits offering foreign securities and foreign financial instruments that are not admitted for public placement/circulation in Russia to an unlimited group of persons, or to persons who are not qualified investors.

Activities of joint-stock investment funds, and management of joint-stock investment funds or mutual funds, require a license issued by the Central Bank of the Russian Federation.

Since the activities of funds are heavily regulated in Russia, there are various restrictions on the management of funds. For example, a management company cannot acquire assets which are not listed in the law and the investment declaration of an investment fund. Compensation of the management company cannot exceed 10% average annual net asset value of the investment fund.

A person entering into a derivative contract by way of business must have a license for banking operations or a license of a professional participant on the securities market (in particular, for brokerage or forex dealer activities) whereas entering into derivatives contract intended for qualified investors is possible only through such persons. Entering into such contracts on an organized exchange is possible where the other party to the agreement is a central counterparty.

The Civil Code of the Russian Federation also regulates deals where there is an obligation on a party to pay monetary amounts depending on the changing price of:

• goods;
• securities;
• exchange rates;
• interest rates;
• inflation rates;
• parameters calculated as an aggregate of the indicators specified above; or
• an occurrence of any other event provided by the law where it is not known whether such event will happen or not.

The claims in respect of such deals are only subject to court protection if at least one of the parties is a legal entity with a license for the banking operations or professional activities on the securities market or, if the deal is made on an authorized exchange, at least one party is a legal entity with a license authorizing it to make deals on an organized exchange. If an individual is a party to such deal, court protection will only be provided if such deal has been made on an organized exchange or in other cases directly stated in the law.

Derivatives may be traded over-the-counter or on an organized exchange.

All of the main types of derivative contract are used in Russia:

• forwards;
• futures (most wide-spread and popular);
• swaps; and
• options (call options and put options).

The value of the derivative contract is based on the value of the underlying assets which, among others, may be:

• securities;
• commodities;
• foreign currency;
• interest rates;
• inflation rate; or
• credit events.

Over-the-counter derivative contracts, unlike those made on an organized exchange, do not have any system of centralized control, guarantees of performance, risk-management system or requirements on the participants. This risk analysis is carried out by the market player itself.

However, at the moment the Central Bank of the Russian Federation is developing amendments to the relevant laws in order to mitigate the mentioned risks and improve the infrastructure of the over-the-counter derivatives market, including centralized clearing, accreditation of price centers and repository activities. In particular, in 2019 the CBR introduced its new approach to further enactment of the new rules for variation margin for non-exchange traded derivatives that should be put into effect in several stages. This area of law is therefore subject to possible changes.