Category: Russia

On March 19, 2020, CEE Legal Matters reported that Linklaters had advised Sovcombank on its arrangement of a RUB 5.7 billion domestic green project bonds issued by an orphan special purpose vehicle, SFO RuSol 1 LLC. We spoke to Sergei Kaduk, Executive Director for Securitization and Project Finance at Sovcombank, about the Issuance.

CEELM: To start, can you give us some details about the deal?

Sergei: SFO Rusol1 is the first in Russia securitization of Solar Power Stations’ receipts. It was also the largest ruble “green” bond transaction ever, at 5.7 billion rubles.

The originator of this transaction, Solar Systems, has built two power stations of 15 MW each in the Astrakhan region of Russia as part of Government Ordinance No. 449, dated May 28, 2013, “On stimulating renewable energy sources in the wholesale market of electric energy and capacity.” Under this Ordinance the investor receives guaranteed payments over 12-15 years to compensate his investments with a certain rate of return. With power stations being completed and set to start production Solar Systems was able to refinance its debt and leverage up with the help of securitization.

CEELM: Why did Sovcombank choose to take the lead on this debt issuance?

Sergei: Our main consideration was to break into the utility market and to create a new securitization class of assets. Virtually all new power generation in Russia is built using the same mechanism, called DPM. DPM – agreements for providing power – are the contracts under which investors get compensated at a certain rate of the returns of large commercial off-takers.

We securitized just 30 MW and the total new generation is over 1500 MW. Sovcombank has now a lead over bigger rivals such as Gazprombank and Sberbank.

In addition, our creative structuring (three tranches, subordination, etc.) has allowed for very low capital reserve requirements for investing in Class A. The Bank’s ROE from investing in these bonds was close to 100%. It is impossible to get these rates of return if you just provide a commercial loan to the stations.

CEELM: What would you say were the most complex aspects of this particular green bond issuance?

Sergei: Very soon we realized that we could not do a classic securitization because the true-sale of DPM contracts to the SPV bore a significant tax risk.

We had to create a synthetic securitization – something that had not yet been done under Russian law. We were able to effectively replicate a eurobond structure when bond proceeds are given in the form of a loan from the SPV to solar stations.

It also meant that we needed an unsecured bridge loan to facilitate the transition of pledged assets from the existing creditor, EuroAsian Development Bank, to the SPV.

CEELM: How did you split the legal work involved between your in-house legal team and your external advisors on the matter?

Sergei: We mostly relied on Linklaters’ expertise and their team lead by Andrei Murygin to prepare all the necessary documentation.

The bank’s in-house team mostly just reviewed the documentation. We paid more attention of course to the agreements where the bank was a party, such as the bridge loans, service and payment agent agreements, pledging the SPV bank account, and so on.

Solar Systems also hired Bryan Cave Leighton Paisner to help them understand and review the project documentation.

CEELM: And while on the subject, why did you turn to Linklaters for support?

Sergei: Linklaters is among the three major legal firms that have the most experience in securitization in Russia. They have knowledge not only in capital markets but also in project finance so their expertise was most relevant for such a novel and complex deal.

As announced by the Russian President on 25 March 2020, the Russian Ministry of Finance has sent an official request to the Ministry of Finance of Cyprus to modify the existing double taxation treaty (DTT) between the two countries.

Cyprus is expected to reply by 15 June 2020.

If Cypriot authorities refuse to negotiate the requested amendments to the DTT, Russia reserves the right to terminate the DTT unilaterally.

Contents of the requested amendments

As specifically mentioned in an official letter from the Russian Ministry of Finance (of which CMS Russia obtained a copy), despite the international efforts aimed at fighting tax-base erosion and profit shifting, multinational enterprises continue structuring their businesses in tax favourable jurisdictions in such a way that shifts profits from Russia. This gives rise to unfair tax competition, negatively affecting good-faith taxpayers in Russia.

Based on the text of the letter and a draft Protocol of DTT amendments attached to it, the following modifications have been proposed:

• The withholding taxation rate on dividends under Article 10 of the DTT will be increased to 15% (which is the equivalent of the withholding tax rate applicable to dividends under Russian domestic law).

Currently, applicable DTT rates vary from 5% to 10%, depending on fulfilment of investment criteria.

• Article 11 of the DTT will be amended to introduce withholding taxation of outbound interest payments at a 15% rate.

Currently, such cross-border interest payments are exempt from withholding taxation under the DTT.

Comments

As evident from the letter, Russian authorities have ultimately chosen the most straightforward approach to addressing the President’s announcement, immediately increasing withholding taxation rates both to outbound interest and dividends payments.

Previously, the business community expected that the initiative to increase withholding rates would be applied in a more limited manner, such as aiming it at structures that lack real economic substance and which were put in place solely for tax-avoidance purposes.

If the requested amendments are introduced to the DTT, it may be reasonably expected that newly increased withholding tax rates will not only apply to direct payments made to Cypriot entities, but also indirect ones made through other jurisdictions, provided that the ultimate beneficial owner of such income is located in Cyprus (based on recent court practice on beneficial ownership issues).

However, should Cyprus refuse to introduce the requested changes, the DTT will be terminated unilaterally, and outbound payments made from Russia will be subject to domestic law regulations leading to:

• the application of a 15% domestic withholding tax rate on dividends payments;

• the application of a 20% withholding tax rate on other outbound payments (e.g. interest, royalties, etc.) subject to withholding taxation in Russia under domestic rules; and

• the termination of tax information exchanges, potentially resulting in toughened tax rules for structures falling under specific transfer pricing requirements or rules applicable to controlled foreign corporations in Russia.

Also, in this context, it is highly probable that other jurisdictions will be approached for DTT modifications in the short run. These jurisdictions are likely to include the Netherlands, Switzerland and Luxembourg, which are frequently used as locations for transit-holding companies due to their attractive tax regimes.

If the requested amendments are introduced or even if DTTs with such jurisdictions are terminated, it will be necessary to reconsider existing corporate structures in particular to remove intermediary layers lacking real economic substance. As the respective changes to DTTs can be expected as early as 2021, companies should make internal analyses as soon as it is apparent what the concerned jurisdictions will be.

By Dominique Tissot, Partner, and Maria Kabanova, Senior Associate, CMS Russia

Following Mr. Putin’s speech on 2 April 2020, measures promoting isolation such as nationwide non-working days and regional quarantine measures are being extended until end of April/beginning of May. This will also impact the activity of the Russian Federal Antimonopoly Service (FAS). It can be expected that at least the measures currently implemented by FAS will be extended. So far FAS has done the following in connection with the COVID-19 epidemics.

 Government Procurement

FAS has declared that the COVID-19 epidemics shall be regarded as force majeure in relation to government procurement, which according to FAS shall be taken into account inter alia when considering potential administrative liability. In addition, the procurement of goods required for fighting the COVID-19 epidemics has been eased, with purchases from just one supplier being permitted.

 Inspections and Hearings

FAS has temporarily put on hold regular on-site inspections, with an exception for unscheduled inspections in certain cases. Comissions investigating antimonopoly cases work remotely, with the use of video-conference, or hearings can be postponed observing all required deadlines. Initially this measure has been limited until 10 April 2020, with an extension being likely in light of the overall situation with COVID-19.

 Review of Prices

Similar to the European competition authorities FAS is paying attention to prevent abuse of this extraordinary situation. A particular area of ongoing review by FAS is the pricing of certain “socially important” goods. This comprises the monitoring of basic food products and weekly reporting to the Russian government. FAS has also been monitoring the pricing of face masks as well as mobile phone tariffs, the latter in connection with the increased use of mobile communication due to widespread work from home.

 Advertisement Law

FAS has held that an advertisement for the medicine “Arbidol” violates Russian advertisement law. The medicine was apparently being advertised as being effective against Coronavirus. FAS based its decision in particular on the fact that the effectiveness against Coronavirus was allegedly beyond the effect as described in the instructions for that medicine which foresaw its use mainly against influenza. 

 Merger Control and Strategic Investment Filings

As for review of merger control filings as well as so-called “strategic investment” filings, there have been no changes in the review periods so far. Bearing in mind that FAS is entitled to prolong the standard 1-month term of review of merger control filings for another two months, FAS has a certain flexibility. However, extensions can be expected.

By Stefan Wolfgang Weber, Associated Partner, and Artem Kara, Senior Associate, Noerr

Bryan Cave Leighton Paisner has advised PJSC RusHydro on the sale of a 90% shareholding in JSC International Energy Corporation to OJSC Hrazdan Power Company. As part of the transaction, OJSC refinanced MEK’s debt obligations to the EBRD and the Asian Development Bank.

JSC International Energy Corporation is an Armenia-based power generation company. According to BCLP, “it operates seven hydropower plants with a combined installed capacity of 561.4 MW or 14% of the country’s total installed capacity. The cascade of hydropower plants produces 8-10% of Armenia’s electricity per year.”

BCLP’s team was led by Partners Matvey Kaploukhiy and Oleg Khokhlov and included Counsels Oksana Orlovskaya and Igor Zhivotov.

Bryan Cave Leighton Paisner did not reply to our inquiry on the matter.

 

Kachkin & Partners has successfully defended the interests of the Mamoshin Architectural Workshop in a dispute over the creation of a new stage at the Maly Drama Theater in St. Petersburg.

According to Kachkin & Partners, its success ended a long dispute between the Mamoshin Architectural Workshop and the North-West Directorate for the Construction, Reconstruction and Restoration of the Ministry of Culture of the Russian Federation involving the latter’s improper use of the MAW’s designs. According to the firm, “the lawyers of the bureau achieved not only a ban on the use of the [MAW’s] architectural project, but also the recovery from the defendant of the maximum amount of compensation in the amount of twice the cost of the volume of architectural solutions.” The MAW was awarded RUB 22.4 million in damages.

“We were especially pleased to hear the final verdict in favor of our client, since the decision of the court of appeal takes effect immediately, which allows us to hope that finally the rights of the architect will be restored,” said Kachkin & Partners’ Partner Dmitry Nekrestyanov.

During his national address on 2 April, President Putin announced his decision to prolong the initial non-working days from 4 April to 30 April 2020 inclusive in order to fight against the spread of COVID-19. He signed a new Executive Order providing for this.

Decision makers within companies need to update their strategy for the continuity of their businesses. To assist them with this task, we have summarised below, based on the latest legal developments related to the COVID-19 outbreak, legal considerations to bear in mind. These cover commercial contracts, employment, real estate leases, tax, bankruptcy and financing arrangements.

Commercial contracts

Under Russian civil law, a legal entity is relieved from liability for failure to fulfil an obligation if such failure is caused by extraordinary and inevitable circumstances (i.e. force majeure circumstances). The spread of the coronavirus and the restrictive measures authorities take to combat the pandemic may be considered as force majeure events.

If the extension of the non-working days until 30 April impedes or may potentially impede the performance of your contracts, we recommend taking the following steps:

• Determining which contracts can be affected and how they can be impacted, analysing these contracts’ provisions on force majeure (if any) and the respective procedures to be followed, and reviewing other relevant clauses, such as those setting forth the governing law and disputes resolution procedure (arbitration clause).
• Preparing notices to your counterparties to address the situation, pointing out already existing force majeure conditions and describing their effect on the implementation of contracts, offering mutually acceptable solutions or showing your intention to enter into negotiations.
• If the non-fulfilment of a contractual obligation was caused by restrictions introduced in connection with the COVID-19 outbreak, obtaining the relevant certificates evidencing force majeure events from the Chamber of Commerce and Industry of the Russian Federation, or another competent authority as may be provided in the relevant contract.
• Please bear in mind that the issue of the application of force majeure conditions will be decided on a case-by-case basis by a court or an arbitration tribunal, depending on the circumstances of the particular case and the terms of the contract concluded between the parties. For more details, please see our eAlert dedicated to the force majeure effect of the pandemic in Russia.

If you foresee that the extended non-working days will have a detrimental effect on your counterparties’ ability to perform contracts, you should discuss potential issues openly with them before making advance payments, deliveries on terms of commercial credit or performing contractual obligations from your side.

Employment

During the renewed non-working days, employees in Russia will continue to be entitled to fully paid days off.

As we commented in our previous eAlert, certain categories of companies may continue to operate. A detailed list of such companies can be found in Recommendations of the Russian Ministry of Labour and in an Update to them.

All companies that do not fall under the exceptions have to release their employees from work in their workplaces during the above period, while continuing to pay them their salaries.

Based on the above recommendations of the Ministry of Labour, we believe that employees working remotely (from home) can continue to work this way. However, working remotely during this period will be allowed only subject to the employees’ consent. The employees who agreed to work remotely should be paid their regular salaries.

Real estate leases

According to applicable legislation, force majeure may only generally serve as a basis for postponing the execution of obligations under a lease contract and the parties may avoid liability under the contract for failure to fulfil their obligations. However, on 1 April 2020 new Federal Law No. 98-FZ was adopted to regulate, among others, rental relations in 2020 and introduce the possibility of reducing rents when it is impossible to use leased properties.

Taking into consideration the above and in the current circumstances:

• Tenants may avoid liability under their leases for failure to timely fulfil their payment obligations.
• Tenant may request to defer rent payments in 2020 in relation to real estate lease agreements concluded before the adoption of a decision on the introduction of a high-alert regime or state of emergency in 2020. Please note that Moscow and the Moscow Region have declared such high-alert regime.
• Tenants can demand a reduction in rent for 2020 due to the inability to use the leased property.
• Landlords will not be liable for losses suffered by tenants or for any other penalties under the contract due to the closure of the leased premises.

However, without a detailed analysis of the act of the government on the procedure for a deferment or reduction in 2020 and terms of the lease that is yet to be adopted, it is currently impossible to assess the likelihood that such claims will succeed.

For more information on how the COVID-19 pandemic affects Russian-law leases, please see our previous eAlert.

Tax

Due to the prolongation of non-working days until 30 April 2020, the deadlines for submitting tax reporting or making tax payments due in the first quarter of 2020 has now been shifted to 6 May 2020 (the first working day after the May public holidays in Russia). This is, for example, the case for annual financial statements or yearly corporate profit tax returns for 2019.

According to modifications recently made to the Russian Tax Code by Federal Law No. 102-FZ dated 1 April 2020, if any tax reporting or payment deadline falls on a non-working day, such deadline will be deemed to expire on the next working day after that day. Previously, a similar provision applied only to official days of rest or public holidays in Russia.

Federal Law No. 102-FZ also grants the Russian government with additional authorities to extend the tax reporting and payment deadlines in 2020 in Russia. This being said, further details and clarifications on the matter can be expected in governmental acts pursuant to this Federal Law.

However, based on the recently reflected position of the Russian tax authorities, such deadlines can only be extended provided that a taxpayer does not continue to work during the non-working days (some organisations being explicitly allowed to do so by Presidential Executive Order dated 25 March 2020). To rely on this position, taxpayers would need to prove to the tax authorities that they did not continue work within this period (e.g. based on internal labour documentation issued during this period). It remains unclear how this position would apply to companies where only part of the employees continue to work either in the workplaces or remotely.

Previously the Russian Federal Tax Service had announced that the deadline for submitting annual financial statements would be shifted to 6 April 2020.

Bankruptcy considerations

On 1 April 2020, Federal Law No. 98-FZ came into force authorising the Russian government to impose a moratorium on the initiation of bankruptcy proceedings. For more details, please see our previous eAlert. 

Financing arrangements

The slowdown in the activities of certain borrowers due to COVID-19 may lead to delays in meeting payment obligations and breaches of financial, performance based and general covenants under their financing arrangements which, as a consequence, may lead to restructuring discussions, waivers and/or enforcements.

An introduction of the right for the Russian authorities to potentially declare a moratorium on commencement of bankruptcy proceedings with respect to certain borrowers or categories of borrowers may invoke discussions whether or not any of the events of default in the loan agreements will be triggered or may require revisions (from the lender’s perspective).

The effect of COVID-19 on the provisions of the loan agreements dealing with extraordinary circumstances, such as the terms of any business interruption or material adverse change provisions, may give rise to discussions between borrowers and lenders. At the same time, borrowers affected by anti-COVID-19 measures may wish to consider what remedies or reliefs are available to them in case of non-performance under their loan agreements and applicable law (such as force majeure).

Under Federal Law No. 106-FZ dated 3 April 2020, small and medium-sized enterprises working in sectors to be determined by the government will be entitled (for the period until 30 September 2020) to ask for a moratorium of loan repayment (or reduction of repayment amounts) during a period of up to six months (the “Repayment Moratorium Period”). During the Repayment Moratorium Period no penalties, early repayment or enforcement of security can be claimed by the lender. After the end of the Repayment Moratorium Period, the borrower will be obliged to repay all principal and accrued interest for the Repayment Moratorium Period in accordance with the terms of the loan agreement effective before the Repayment Moratorium Period.

By Georgy Daneliya, Counsel, Ekaterina Elekchyan, Senior Associate, Dominique Tissot, Partner, Sergey Yuryev, Partner, Artashes Oganov, Partner, and Konstantin Baranov, Partner, CMS Russia

The Covid-19 pandemic has created new legal challenges for many businesses worldwide. However, certain aspects of privacy law still have to be complied with, despite the difficult situation in the market. This poses additional challenges to businesses struggling in the new, rapidly changing environment. Recently, the Russian data protection authority (Roskomnadzor) clarified how employers could monitor the health status of their employees in compliance with Russian privacy law.

Due to the spread of Covid-19, employers are obliged to measure the body temperature of their employees in order to detect sick employees and therefore limit their access to work. From a privacy law angle, body temperature counts as health data, which in turn is considered a special category of personal data (sensitive data). Collection of such personal data can only be done subject to the handwritten consent of the relevant employee, or if otherwise allowed by employment legislation. The Russian Labour Code states that employers may not collect health data from their employees unless such data is necessary for deciding whether an employee can perform their job. In that case, no consent is required.

Furthermore, Roskomnadzor clarified the situation with respect to measuring the body temperature of company visitors who are not employed by the company they are visiting. In such cases, consent to the collection of health data is given by implied conduct (i.e. the intention to visit the company). No consent would be necessary in that case either. However, the company measuring visitors’ body temperature would have to provide a proper notice to the visitors that their body temperature will be monitored if they visit the company.

Finally, Roskomnadzor emphasised that the body temperature data collected must be deleted within one day, since the purpose of processing has been achieved.

By Vyacheslav Khayryuzov, Counsel, Noerr

On 1 April 2020, Federal Laws No. 98-FZ, 99-FZ and 100-FZ came into force in connection with the spread of COVID-19, the disease caused by the coronavirus.

In particular, these laws do the following:

• toughen administrative and criminal liability for violation of sanitary and epidemiological rules;

• provide the Russian government with additional powers to introduce a high-alert regime and state of emergency;

• regulate the introduction of a moratorium on bankruptcy proceedings;

• introduce rules for deferring and reviewing rental payments;

• allow state and municipal procurement without observing the established competitive procedures in specific cases; and

• provide the Russian government with the right to establish special rules for the registration and circulation of medicines and medical devices to prevent the spread of dangerous diseases.

Strengthening administrative and criminal liability for violation of sanitary and epidemiological rules

Administrative liability

The amendments provide administrative liability for:

• violation of sanitary and epidemiological rules or failure to comply with anti-epidemic measures during emergencies in the event of the threat of the spread of a dangerous disease or when a quarantine has been introduced within a specific territory; or

• failure to comply with legal requests or instructions of an authorised body regarding anti-epidemic measures (e.g. a quarantine order issued to a person who has returned from abroad).

These violations will be punished by a fine in the following amounts:

• up to RUB 40,000 (EUR 470) for individuals;

• up to RUB 150,000 (EUR 1,750) for company officials;

• up to RUB 150,000 (EUR 1,750) for individual entrepreneurs;

• up to RUB 500,000 (EUR 5,830) for legal entities.

As an alternative to fines, the business activity of individual entrepreneurs and legal entities may be suspended for up to 90 days.

If the violation resulted in injuries or the death of a person (provided that such violation is not a criminal offence), the maximum fine would be RUB 300,000 (EUR 3,500) for individuals and RUB 1 million (EUR 11,660) for individual entrepreneurs and legal entities. In this case, administrative suspension of operations for up to 90 days can also be applied as an alternative sanction to individual entrepreneurs and legal entities. As for company officials, they can be fined up to or RUB 500,000 (EUR 5,830) or disqualified from holding certain positions for up to three years.

Moreover, administrative liability is introduced for non-compliance with rules applicable during the state of emergency or high-alert regime (except for the breach of sanitary and epidemiological rules described above). This liability consists of:

• for individuals – a fine up to RUB 30,000 (EUR 350);

• for company officials – a fine up to RUB 50,000 (EUR 583);

• for individual entrepreneurs – a fine up to RUB 50,000 (EUR 583);

• for legal entities – a fine up to RUB 300,000 (EUR 3,500).

Currently, a high-alert regime has been introduced and rules on self-isolation have been established in Moscow and many regions of Russia.

Criminal liability

Criminal liability for violations of sanitary and epidemiological rules has also been strengthened.

Criminal liability for violation of sanitary and epidemiological rules, which causes mass disease among people through negligence or creates the threat of mass disease can result in one of the following penalties being imposed:

• a fine up to RUB 700,000 (EUR 8,165) or the equivalent in salary for up to eighteen months;

• disqualification from holding certain positions for up to three years;

• restriction of freedom for up to two years;

• compulsory labour for up to two years; or

• imprisonment for up to two years.

If the violation caused a person’s death by negligence, the following sanctions can be imposed:

• a fine up to RUB 2 million (EUR 23,330) or in the amount of salary for up to three years; or

• restriction of freedom for up to four years; or

• compulsory labour for up to five years; or

• imprisonment for up to five years.

If a violation caused the death of two or more people by negligence, the sanctions are:

• compulsory labour for up to five years; or

• imprisonment for up to seven years.

Prior to these amendments, criminal liability was provided only in cases where the violation led to mass illness or death of a person. According to the new rules, creating a threat of mass illness can already be qualified as a criminal offence.

To date, there are already examples of criminal cases initiated for violations of the quarantine.

Taking into account the amendments, we recommend that any and all measures initiated by the authorities regarding the quarantine and self-isolation of persons be strictly observed.

New powers of the government on introducing the high-alert regime and state of emergency

The government will be able to introduce high-alert and state of emergency regimes throughout Russia or in specific regions. Also, the government will be able to introduce obligatory rules of conduct during these regimes.

In the past, only the President could introduce such regimes.

Moratorium on the initiation of bankruptcy proceedings

Federal Law No. 98-FZ introduces new provisions to the Federal Law “On Bankruptcy” which entitle the Russian government to impose a moratorium on the initiation of bankruptcy proceedings “to ensure stability in the economy in exceptional cases (i.e. natural and technogenic emergencies, significant changes in the rouble exchange rate and other similar circumstances)”.

The government is to determine the duration of this moratorium and the sectors (or specific categories of persons or list of persons) to which it applies.

When the moratorium is imposed, the courts will have to return applications for declaring a debtor bankrupt to their creditors. The applications submitted before the moratorium, but not yet accepted by the court, are also subject to return. Debtors who are subject to the moratorium are also exempt from the obligation to file for their own bankruptcy.

A number of restrictions are imposed on these debtors, and the most significant ones include the following:

• Participants or shareholders are not allowed to withdraw from the company, and the debtor is not allowed to buy out the placed shares or participatory interests.

• It is not permitted to terminate the debtor’s obligations by set-off if it disrupts the priority of creditors’ claims.

• It is not permitted to pay dividends or to make distributions on participatory interests, and to distribute profits between the debtor’s participants.

• Penalties and other financial sanctions for the non-performance of monetary obligations and mandatory payments do not accrue.

• Enforcement over pledged assets is not allowed, whether through court or out-of-court procedures.

• Enforcement proceedings on pecuniary sanctions for claims that arose before the introduction of the moratorium are suspended (but seizure of the debtor’s property and other restrictions on the disposal of the debtor’s property remain in force).

The amendment also provides for an extremely strict measure aimed at preventing stripping companies falling under the moratorium of their assets.

If a bankruptcy case is still initiated against a company within three months after the end of the moratorium, all its transactions related to the transfer of property and the acceptance of obligations made during the moratorium period will be considered null and void. This measure does not apply to transactions made in the ordinary course of business if the price of the property transferred under this transaction does not exceed 1% of the value of the company’s assets.

The moratorium is expected to contribute to maintaining financial stability for companies most affected by the crisis. On the other hand, the moratorium significantly restricts the rights of these companies and their participants. Those who conclude agreements with companies subject to the moratorium should closely review the terms of their transactions to minimise the risk that these transactions will be recognised as null and void.

Real estate rental payments in 2020

The provisions of Law No. 98-FZ also apply to the regulation of rental relations in 2020 and the possibility of reducing rents when it is impossible for tenants to use the leased property.

The Law provides for the following:

• the possibility of deferring rent payment in 2020 in relation to real estate lease agreements concluded before the adoption of a decision on the introduction of a high-alert regime or state of emergency in 2020; and

• the tenant’s right to demand a reduction in rent for 2020 due to the inability to use the property. Moreover, according to the Law, the Russian government will establish the requirements for the conditions and duration of such a deferment.

These new provisions generally comply with the requirements of current legislation regarding force majeure and a decrease in rents if conditions have worsened for using the property. At the same time, they give certainty regarding the current situation with COVID-19 as grounds for the tenant to demand a deferment and/or reduction in rent. However, for a more detailed presentation of the procedure for a deferment or reduction, it is necessary to wait for the corresponding act of the government.

Changes to the regulation of public procurement

Federal Law No. No. 98-FZ also introduces amendments to the Russian Public Procurement Law.

More specifically, in accordance with the amendments, goods, works and services (“goods”) may be purchased without observing the established competitive procedures if the following conditions are met:

• such goods are needed for urgent provision of medical aid, subject to the following:

– the medical aid is required due to an accident, a force majeure event or with a view to prevent or eliminate the consequences of an emergency, or in a few other cases; and

– complying with time-consuming competitive procedures is unjustified under the given circumstances requiring urgent measures; or

• the goods are listed by the competent authorities and are purchased by state bodies and state-owned companies responsible for national defence and security, including the fight against terrorism.

Another important change makes it possible for parties to an existing public procurement agreement to amend the timing of the performance and the price of the agreement if it is no longer possible to perform the agreement due to COVID-19 or other force majeure reasons.

This exceptional regulation is subject to several conditions and will remain in force until the end of 2020.

New powers of the government for medicines and medical devices

Under Federal Law No. 98-FZ, the Russian government has received the right to adopt special rules for the registration and further circulation of medicines and medical devices designed to prevent emergency situations, as well as the prevention and treatment of diseases that pose a danger to others.

In particular, the government will have the right to establish restrictions on the retail and wholesale trade of medical devices. It will determine the list of these medical devices and the duration of restrictions, which cannot, in any case, exceed 90 days.

The Law does not establish concrete measures that the government can take. However, we can expect that, above all, these will be measures aimed at speeding the process of registering and putting drugs and medical products that combat the pandemic on the market.

There could also be measures aimed at ensuring the availability of medical products for medical institutions and individuals.

By Vsevolod Tyupa, Counsel, Irina Shurmina, Senior Associate, Konstantin Baranov, Partner, Igor Sokolov, Senior Associate, Artashes Oganov, Partner, and Maxim Boulba, Partner, CMS Russia

“The Russian Government has been very active in addressing concerns of business regarding inadequate regulatory control that has been increasing over last years,” says Andrey Ryabinin, Partner at Integrites in Moscow. “Several declarations have been made in this respect. As part of the reform known as ‘regulatory guillotine’ the Government is expected to eliminate in 2020-2021 several thousand outdated and excessive regulations in various industries regarding technical standards and requirements in business practice, most of which date back all the way to the Soviet times.”

“If at least some of the declarations actually get implemented, I think we would be much better off,” Ryabinin says. “Additionally, independence of the courts would potentially bring new business and investment, which is always a great thing, and something we hope to witness in the near future.”

As everywhere else, the Covid-19 crisis has turned the agenda for business and government upside down in just few weeks, Ryabinin reports. According to him, “in Russia, a dramatic change in attitude and respective governmental actions took place in the second half of March, but regulatory changes have been very swift yet sporadic, creating a lot of stress for businesses to adapt and react.” He adds that “major issues in this respect include labor issues related to remote work and significant labor cuts expected in many industries; non-performance of commercial contracts and massive attempts to avoid contracts with or without justified grounds and applicability of force majeure; massive personal and corporate bankruptcies and restructurings that will follow after a six-month moratorium on bankruptcy petitions lapses, and the enforcement of state regulations imposing restrictions and providing for support measures in response to Covid-19 and economic crisis situations.”

Apart from the crisis, Ryabinin says that some investors are nervous about the Government’s interference in commercial disputes. “This is supposed to change,” says Ryabinin, “as the Ministry of Police recently proclaimed that they would, in the future, try to ensure that the police would not interfere when there is a pending civil dispute until a civil judgment is issued. We are skeptical how this will play out, however, considering that according to the law itself, the police have to take measures once a case is filed, and we are hoping this is not just a declaration to make investors happier.”

“There are currently two main drivers in litigation,” reports Ryabinin. “The first is bankruptcy cases, where we have seen a lot of development, especially in making top management liable for debts or the bankruptcy of the company.” According to him, “there have been a few examples recently in which the shareholders were held liable, such as when Dmitry and Aleksey Ananyev’s bank Promsvyazbank was effectively nationalized by the Central Bank of Russia. This trend was strengthened after a recent judgement explained that the liability of former top management could also be inherited by their successors. On the other hand there is now a bill to expand restructurings in bankruptcy instead of liquidations of assets which now is used in over 95% of bankruptcies.”

The other trend, Ryabinin says, is an increase in litigation against state authorities. “Earlier we saw a big number of cases against tax authorities,” he says. “This has forced tax authorities to be more efficient at the pre-litigation stage and minimize the number of cases against them, although the number of tax disputes is still rather significant.” While he applauds the trend, Ryabinin is dissatisfied with the fact that the courts have demonstrated a pro-state bias. “When the situation is not completely obvious, the courts tend to rule in favor of the state authorities. This is not good, as it makes investors less optimistic and willing to invest.”

“We have also seen an increasing number of cases against the customs authority, which makes for a very problematic situation for any business that relies on import,” Ryabinin says, noting that this is unlikely to change soon.

Ryabinin says that the economy is not developing actively, although at least in early March there were no signs that a recession was coming, and many experts predicted 1-2% GDP growth and a stable rate of inflation. However, in light of Covid-19, crisis those predictions are changing, and a recession seems increasingly likely.

In terms of sectors, Ryabinin says that “the agriculture sector has been growing quickly,” and he describes investment in the area as “great.” According to him, “the State has supported agriculture with multiple subsidies, as well as low interest rates of only 2 or 3%.” In other areas however, he says the government’s approach is still “very cautious.”

 

Under Russian civil law, a legal entity is relieved from liability for failure to fulfil an obligation if such failure is caused by extraordinary and inevitable circumstances (i.e. force majeure circumstances).

The spread of the coronavirus and the restrictive measures authorities take to combat the pandemic may be considered as force majeure events. This approach with respect to agreements concluded with the Moscow Government is enshrined in an Executive Order of the Mayor of Moscow and, for public procurement, in a letter of the Russian Federal Anti-monopoly Service.

In the event of a dispute, the COVID-19 situation and the imposition of restrictive measures by the relevant authorities are not universal grounds for the non-fulfilment of contractual obligations and for exemption from liability. The issue of the application of force majeure conditions will be decided on a case-by-case basis by a court or an arbitration tribunal, depending on the circumstances of the particular case and the terms of the contract concluded between the parties.

To this end, a number of elements will be taken into account:

• the nature of the unfulfilled obligation;
• the time period for its fulfilment;
• how the spread of the virus and the introduction of related measures by the authorities prevent the fulfilment of the obligation; and
• whether the debtor under the contract could have taken measures to fulfil the obligation despite the COVID-19 outbreak.

Many agreements also provide for a specific procedure applicable to the parties in the event of force majeure, and failure to comply with it will deprive the party of the right to invoke such circumstances.

In foreign trade contracts governed by Russian law, the recognition of force majeure circumstances will also depend on the decision of the chamber of commerce of the country of the party defaulting on obligations and referring to force majeure events and other factors.

As at the time of writing, the Chamber of Commerce and Industry of the Russian Federation recognises the spread of COVID-19 as force majeure and issues the relevant certificates if non-fulfilment was caused by restrictions introduced in connection with the COVID-19 outbreak.

If the agreement is governed by a foreign law, then recognition of the COVID-19 pandemic as force majeure and the legal consequences for the parties will be determined on the basis of the applicable rules of the governing law of the other country.

Notably, a number of jurisdictions, especially with common law systems, include rules in which a circumstance is recognised as force majeure only if it is expressly stated as such in the text of a contract. For instance, English law, a popular choice of law governing foreign trade contracts, lacks the concept of force majeure unless the contract specifically sets forth its definition, consequences and respective procedures.

In light of the above, we recommend that you now review the provisions of any agreements whose implementation may be affected by the introduction of restrictive measures by the authorities in connection with the COVID-19 situation to check if they contain force majeure provisions and continue to take measures to prevent or minimise losses for your company.

By Sergey Yuryev, Partner, Georgy Daneliya, Counsel, Maxim Gubanov, Senior Associate, and Alexey Shadrin, Associate, CMS Russia