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Project Financings May Benefit from New Convertible Currency Rules - International Law Office

International Law Office

Projects & Procurement - Russia

Project Financings May Benefit from New Convertible Currency Rules

October 22 2002

In a recent interview, Sergei Ignatyev, the new chairman of the Central Bank of Russia, indicated that the current 50% rate for mandatory conversion of convertible currency proceeds received by Russian legal entities may be reduced to 35% by the end of the year. Such a reduction would require either (i) the amendment of the Russian Federation Law on Currency Control, or (ii) the inclusion of a relevant provision in a new version of this law scheduled to be adopted this autumn.

If adopted, this change would signal the government's commitment to further liberalization of Russia's convertible currency regulations. This in turn would significantly simplify project financings of Russian companies, since it would permit Russian borrowers to retain hard-currency earnings, which may be used as collateral. Lenders have generally avoided project financings in Russia, since retention of hard-currency receivables in security collateral accounts has been complicated by the mandatory conversion rule and other restrictions on transactions in convertible currency.

At present, Russian companies are not allowed to deposit foreign currency they purchased in the domestic market with Russian banks unless they secure a special certificate from the Central Bank, which is granted in limited circumstances (eg, if the lender is an international multilateral agency). The new liberalized rules with respect to mandatory convertible currency conversion, which would effectively increase the convertible currency available to Russian project companies, would allow them to maintain debt service deposits in foreign currency irrespective of whether the lender is a multilateral agency, and to avoid incurring additional expenses related to the conversion of roubles into convertible currency for debt-servicing and collateral deposit account purposes. In addition, it would, to a certain extent, decrease currency and inconvertibility risks for lenders. The ability of Russian project companies to retain a greater portion of convertible currency proceeds may also improve the security package for lenders, as fewer legal risks are associated with a pledge of convertible currency deposits and accounts under Russian law.

Liberalization of the legal regime applicable to foreign currency loans has also begun to increase lender interest in project financings in Russia. Up until last year, any hard-currency loan made by a non-resident of Russia to a resident of Russia (except for authorized banks) with a term in excess of 180 days required permission (licence) from the Central Bank. However, by issuing Regulation 1030-U last September, the Central Bank eased currency rules and abolished the licensing requirement in respect of foreign-currency loans from non-residents.

Arguably, Regulation 1030-U, which became effective on October 1 2001, represents the most significant move towards liberalization of currency regulations in Russia since Presidential Decree 213 of November 15 1991, which allowed Russian companies and citizens to purchase convertible currency and hold convertible currency accounts with Russian banks.

Regulation 1030-U provides that residents may, without restriction, receive and repay loans (including penalties, fines, commission fees, reimbursement of expenses and other obligations) received in convertible currency from non-residents if such loans are deposited into, and repaid from, the accounts of borrowers opened with authorized banks (ie, banks which have a convertible currency licence from the Central Bank). This category also includes foreign currency to be received from/repaid to non-residents to discharge obligations of third parties, and obligations under a guarantee securing performance by a borrower of its obligations under a loan agreement.

Although Regulation 1030-U does not abolish all restrictions applicable to obtaining and repaying loans denominated in foreign currency, it does make project financings in convertible currency more attractive for foreign lenders by removing a significant administrative burden for arranging such financings.

Finally, on September 5 2002 the Central Bank issued Regulation 1192-U, which will become effective on December 1 2002. This regulation represents a further step towards the liberalization of convertible currency rules, as it permits Russian companies to sell convertible currency proceeds not only on the Moscow Interbank Currency Exchange (MICEX) (which has had a long-standing monopoly on such operations, and because one of its major shareholders is the CBR, the CBR has control over operations on MICEX), but also directly to authorized banks. This procedure is also expected to simplify the repayment of borrowings, and decrease conversion and related costs.

Making project financings in Russia more attractive for foreign lenders appears to be one of the reasons behind the liberalization of the mandatory currency conversion rules, although only export-oriented Russian companies with significant foreign currency revenues may currently benefit from them. Convertible currency project financings still remain complicated for those Russian companies that have only rouble proceeds.

For further information on this topic please contact Laura Brank at Chadbourne & Parke by telephone (+7 095 974 2424) or by fax (+7 095 974 2425) or by email (lbrank@chadbourne.com).

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