Russia
To be valid, security shall comply with the following form requirements:
- An agreement on a penalty must be in writing regardless the form of the primary obligation.
- A pledge can be created by a written agreement or by operation of law (in this case the parties may conclude a written agreement regulating their relationship). The pledge of participation interest must also be notarized.
- A surety agreement must be in writing (in some cases it can be created by operation of law).
- An independent guarantee must be granted in a written form that allows for the identification of the terms of a guarantee and to ascertain its authenticity.
The law also states compulsory registration requirements for certain types of pledge that are not created until such registration is made:
- A pledge of participation interest must be registered in the official single register of the legal entities.
- A mortgage (pledge of immovable property) as an encumbrance over the real estate must be registered in the unified state register of real estate.
- For a share pledge, a transfer record must be made on the account on which the rights of the shares owner are recorded.
There is also a register of notifications on the pledge of movable property which is maintained by the notary public. Registration of the pledge is not compulsory but the pledgee is only entitled to refer to the pledge in its relations with the third parties if registration is made. Moreover, regardless of the time the pledge was created, priority will be given to the claim under a pledge which has been registered first.
Are there any restrictions on lending and borrowing?
Lending
A credit agreement in Russia can take two forms:
- a credit facility agreement (the creditor can only be a bank or other credit organization, and the subject matter of such agreement can only be monies); or
- a loan agreement (the creditor can be any other non-credit organizations, including individuals, and the subject matter of such agreement can be monies or other things of general description or securities).
A loan agreement where a creditor is an individual is considered concluded only after monies or other things of general description are transferred to the other party, not after its execution. In other cases such contracts shall be deemed to be concluded on their execution date.
Not all forms of lending activities are regulated, such as loans between individuals.
However, in order to perform operations related to lending activities, the banks and non-banking credit organizations are required to obtain a license from the Central Bank of the Russian Federation (CBR).
Professional consumer lending is only allowed for credit organizations and a number of non-credit financial organizations specified in the law (microfinance organizations, credit cooperatives and pawnshops) and included in a relevant list by the CBR. There are also regulatory requirements stated in the Federal Law 'On Consumer Credit (Loan)' that apply to such professional consumer lenders.
Federal Law 'On Consumer Credit (Loan)' sets out restrictions on credit agreements secured by mortgage which are entered into by a borrower with a non-business related purpose, such as restrictions on the maximum amount of penalties and the amount of the total charges for the credit agreement.
Borrowing
While borrowing is generally not regulated, it is advisable for borrowers to consider whether either the consumer lending or mortgage regimes apply to their activities, in which case they will benefit from the protections mentioned above.
However, the law states some specific restrictions in respect of borrowing, such as:
- an individual declared bankrupt cannot borrow without indicating this fact to the counterparty for five years; and
- there is a general prohibition on borrowing for management companies of investment funds.
What are common lending structures?
A credit agreement in Russia can take the form of a credit facility agreement or a loan agreement. For more information, see Lending and borrowing – restrictions.
A credit facility agreement, being the most common lending instrument in Russia, may be structured in a number of ways to include a variety of features depending on the commercial needs of the parties. A loan agreement is used between individuals or non-credit organizations that only occasionally (not on a regular basis) lend their funds to other parties.
A credit facility agreement is usually provided on a bilateral basis (a single lender providing the entire facility); however, syndicated facility agreements with multiple lenders providing parts of an overall facility are also used on the basis of Federal Law 'On Syndicated Credit (Loan) and Amendments to Certain Legislative Acts of the Russian Federation'. It should be noted that Russian law does not recognize the concept of a trust, thus alternative structures, such as a credit agent (kreditnyj upravlyayushiy), are used in syndicated secured transactions.
Loan durations
There are no particular requirements as to the duration of credit agreements.
Depending on the commercial needs of the parties, the credit agreements may take the form of a term agreement (provided for an agreed period of time), revolving agreement (provided for an agreed period of time with an availability period to extend nearer to maturity of the agreement and which may be redrawn if repaid), etc.
Loan security
A credit agreement can be either secured or unsecured. For more information, see Giving and taking guarantees and security.
Loan commitment
In the case of a credit facility agreement a lender cannot refuse to provide the loan unless there are circumstances evidencing that the loan will not be repaid in the due time. However, in accordance with the long-standing position of Russian courts, a breach of the respective obligation by a creditor will not give rise to the remedy of specific performance; ie a debtor will not have an enforceable right against the creditor to demand the provision of a loan but will have to resort to the remedies of rescission and damages. It is also possible to formulate conditions precedent for such refusal in the credit facility agreement itself.
A lender under the loan agreement is obliged to provide the loan unless there are circumstances evidencing that the loan will not be repaid in the due time with the exception of cases where a lender is an individual (please see Lending and borrowing – restrictions).
Loan repayment
A credit facility or a loan can be repayable on demand, on an amortizing basis (in installments over the life of the loan) or scheduled (usually meaning the facility or loan is repayable in full at maturity).
What are the differences between lending to institutional / professional or other borrowers?
Lending to individuals for non-business related purposes, including mortgage lending, is subject to regulatory restrictions under Federal Law 'On Consumer Credit (Loan)', which are not applicable to institutional and professional borrowers. For more information, see Lending and borrowing – restrictions.
Do the laws recognize the principles of agency and trusts?
The principles of agency are recognized in Russia. For instance, it is possible to appoint an agent to act on behalf of other parties.
The concept of trust, on the other hand, is not recognized under the Russian law, thus alternative structures (such as a credit agent (krieditnyj upravlyayushiy)) are used in syndicated secured transactions.
Are there any other notable risks or issues around lending?
Generally
Credit agreements are subject to general contractual principles. For example, parties must agree on all the essential terms of the relevant type of agreement specified in the law, otherwise the agreement will be deemed unconcluded.
It should be noted that a penalty stated in the agreement may be lowered by the court where it is evidently disproportionate to the consequences of the breach.
Under Russian law a pledge cannot be enforced if the breach of the secured obligation is insignificant and the amount of the claim as a result of this is evidently disproportionate to the value of the pledged property. It is presumed that the breach is insignificant if (i) the overdue amount is less than 5% of the value of the pledged property and (ii) the late payment period is less than three months. In addition, in some cases the court may postpone the enforcement of the pledge.
In case of the pledgor's bankruptcy the pledgee receives only 70% (or 80% for claims under the credit facility agreement) of the funds derived from the enforcement of the pledge in priority. Any remaining claims will be satisfied in the general order.
Specific types of lending
In respect of credits for non-business related purposes, there is more legal protection for the borrower than in the case of corporate credits. The law includes some restrictions specific to consumer lending and mortgage lending to individuals for non-business related purposes. For example, the maximum amount of total charges for credit and the maximum amount of penalties for non-performance or breach of the borrower's obligations are regulated by law, while some services are provided to individuals free of charge.
Standard form documentation
In 2015 the Association of Russian Banks has developed and published a standard Russian-law governed syndicated credit facility agreement which does not include the newer requirements of Federal Law 'On Syndicated Credit (Loan) and Amendments to Certain Legislative Acts of the Russian Federation', however in any case such syndicated facilities are rare. For transactions with a foreign counterparty it is common to choose English law as the governing law and to use Loan Market Association standard forms.
Bilateral finance transactions are more likely to be documented on bank standard form documentation.
Are there any other notable risks or issues around borrowing?
No other notable risks.
It should be noted that there are special types of crimes in respect of borrowing stated in the Criminal Code of the Russian Federation, such as:
- fraud in the sphere of lending;
- unlawful receiving of a credit; and
- malicious avoidance of credit repayment.
The type of punishment varies in respect of each crime. The maximum prison sentence is ten years.
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