Category: Russia

Akin Gump has advised Lukoil on the USD 2.3 billion issuance of Rule 144A/Regulation S notes in two tranches.

According to Akin Gump, “the issuance comprises USD 1.15 billion 2.80% 5.5-year notes due 2027 and USD 1.15 billion 3.60% 10-year notes due 2031. The notes were issued by Lukoil Capital DAC (a wholly-owned subsidiary of PJSC Lukoil) and are guaranteed by PJSC Lukoil.”

According to the firm, the notes have been admitted to the official list of the United Kingdom Financial Conduct Authority and admitted to trading on the main market of the London Stock Exchange.

Akin Gump’s team included Partners Natalia Baratiants, Robert Aulsebrook, Daniel Walsh, and Nnedinma Ifudu Nweke, Counsels Ekaterina Makarova, Julian Veshi, and Andrey Kulikov, and Associate Nikolay Ryashin.

Akin Gump did not reply to our inquiry on the matter.

Clifford Chance has advised Rosbank, Sberbank, Bank Saint-Petersburg, Credit Bank of Moscow, and the Eurasian Development Bank on a RUB 15 billion five-year syndicated loan under Russian law for the Ural Mining & Metallurgical Company.

Rosbank also acted as arranger, documentation agent, and facility agent on the transaction. 

This is the second RUB 15 billion syndicated loan to UMMC that Clifford Chance has advised on this year, after advising the banks on a similar transaction in June (as reported by CEE Legal Matters on July 01, 2021).

According to the firm, UMMC is a Russian mining and metallurgical group and the largest producer of copper, zinc, coal, and precious metals in the country.

The Clifford Chance team was led by Partner Vladimir Barbolin and included Senior Associate Arina Kachanova and Associate Veronika Orlova.

Akin Gump has advised Lukoil on its acquisition of a 15.5% interest in the Shah Deniz natural gas project in the Azerbaijan sector of the Caspian Sea, from Malaysia’s Petronas.

According to Akin Gump, “the transaction is valued at USD 2.25 billion, and the completion is subject to the fulfillment of certain conditions precedent, including approval by SOCAR, the State Oil Company of the Azerbaijan Republic.” According to the firm, “following completion of the sale, Lukoil’s interest in the Shah Deniz natural gas project will increase to 25.5%. The other parties in the project are SOCAR, BP, Turkey’s TPAO (Turkiye Petrolleri Anonim Ortakligi), Iran’s Switzerland-based NICO (Naftiran Intertrade Company), and the European Commission’s SGC (Southern Gas Corridor).”

Akin Gump’s team was led by Partner Natalia Baratiants and included Partner David Sweeney, Senior Counsel Alexander Trukhtanov, and Counsel Eduardo Canales.

Akin Gump did not reply to our inquiry on the matter.

Akin Gump has advised Lukoil on its acquisition of a 25% participating interest in the Shallow Water Absheron Peninsula exploration project in the Azerbaijan sector of the Caspian Sea, from BP. 

The transaction is expected to close before the end of the year.

According to Akin Gump, “after the completion of the sale, BP will remain the operator of the project, holding a 25% interest. The third party in the project is SOCAR, the State Oil Company of the Azerbaijan Republic, with a 50% share.”

Akin Gump’s team was led by Partner Natalia Baratiants and included Partner David Sweeney, Senior Counsel Alexander Trukhtanov, and Counsel Eduardo Canales.

The firm did not reply to our inquiry on the matter.

Korelsky, Ischuk, Astafiev & Partners has successfully represented Chinese manufacturer Shanghai Jilong Economy Development before Russia’s Intellectual Property Court in a trademark dispute with a Russian entrepreneur over the ZRAY brand.

Operating under the ZRAY brand, Shanghai Jilong Economy Development is a manufacturer of leisure products, including surfboards.

According to KIAP, “the client began to supply goods to Russia under the ZRAY brand but was unable to apply for a trademark. A Russian entrepreneur took advantage by registering their own, almost identical trademark, ‘Z-RAY’. This was followed by claims of infringement of the trademark against companies that in good faith sold the [client’s] goods in Russia.”

“The Intellectual Property Court confirmed that such actions were an abuse of the right. The Court held that, by registering a trademark, the entrepreneur sought to oust other sellers of ZRAY surfboards from the Russian market, as well as to obtain unreasonable benefits,” the firm announced. “The court ordered the Federal Service for Intellectual Property to annul the legal protection of the entrepreneur’s trademark.”

“Unfortunately, the practice of so-called ‘squatting’, i.e. the seizure of famous foreign brands by Russian entrepreneurs through registering them as a trademark, is widespread,” KIAP Partner Elena Buranova commented. “Squatters are trying to profit from the fact that not all foreign companies register their trademarks before starting deliveries of goods to Russia. This decision shows that there are effective measures against such actions.”

The KIAP team included Buranova and Lawyer Maxim Tabolo.

An interview with Jean-Francois Marquaire of CMS, about his path from France to Russia.

CEELM: Run us through your background, and how you ended up in Russia.

Marquaire: I graduated – I can hardly pronounce these numbers – in 1980 from the University of Paris II and then continued my education in Business Law and International Law at the University of Aix-Marseille III. My career path then brought me to INSEAD’s Finance for Executives Program and HEC School of Management’s CESA Executive Human Resources Program.

I have worked in France, Europe, Africa, and North America until finally finding the best place on Earth, and I have been working and living in Russia ever since. It’s already been 15 years.

CEELM: Was it always your goal to work outside of France?

Marquaire: I was – and hope I still am – a venturesome man, a cosmopolitan who is open to the world, unlike what many might think of French people. My work as a General Counsel and Executive Officer in various businesses gave me the opportunity to travel a lot and to visit the far corners of the globe. Thus, I have worked for years overseas (Africa, USA, Latin America, etc.) and this probably impacted my DNA, since my kids inherited this love for different cultures and all of them now live outside of France.

CEELM: How would clients describe your working style? What about management style? How do you think it varies from the “common” Russian one, if at all?

Marquaire: That is a tricky question, indeed. It is better to ask them. I can only assume that if I have known and worked for some clients in Russia for 20 years by now, that would indirectly support that they like working with me and CMS.

CEELM: Are there any significant differences between the French and Russian judicial systems and legal markets? Which stand out the most?        

Marquaire: The range of sources of civil law in France (and other continental law countries, like Germany) is much wider than in Russia. Among the sources of civil law of these legal systems, civil codes, and laws containing civil law, form a common ground for the system. Current trends include significant expansion and increasing complexity of the Russian civil law system of sources and its convergence with the so-called Romano-German legal system.

CEELM: What about the cultures? What differences strike you as most resonant and significant?    

Marquaire: After so many years of living in Russia, I feel that I have become more Russian inside and will be biased but there are differences for sure. Some of them can sometimes represent an obstacle in doing business either in France or Russia.

For example, Russians tend to seek a quick return on investment and are very agile in catching opportunities for more money, while the French are rather conservative and averse to radical change.

Yet both Russian and French people are on the same page when it comes to culture, food, music, family, and education.

CEELM: Do you have any plans to move back to France?         

Marquaire: For the moment I am perfectly happy where I am. France remains my home, but it is unlikely that I will settle there in the near future, as my country changes a lot and unfortunately not always for the better…

CEELM: Outside of Russia, which CEE country do you enjoy visiting the most, and why?         

Marquaire: I was lucky indeed to have had a chance to visit all the countries in the CEE region and it is not an easy task to choose the most beautiful among them.

CEELM: What’s your favorite place to take visitors to in Moscow? 

Marquaire: Moscow is for sure the place everyone needs to visit at least once in their life. It has its own energy and vibe. When we had an international meeting of 100+ CMS Tax Partners in Moscow, in 2019, we saw how all the international colleagues were amazed by the city and its caliber, its manifold character, and its openness. Besides the classic spots (Bolshoi, Red Square, Moscow center, and parks) I would also recommend visiting the Ruski restaurant, on the 86th floor of the highest skyscraper in Moscow, to enjoy the marvelous city views and traditional Russian cuisine in a modern interpretation.

This Article was originally published in Issue 8.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

On March 24, 2021, CEE Legal Matters reported that Alrud had advised Sino-Russian joint venture AliExpress Russia on its investment in KazanExpress. We reached out to Alrud Partner and Head of Corporate/M&A Alexander Zharskiy for more information about the deal.

CEELM: Let’s start at the very beginning. How did the firm first get involved in this deal? At what stage were you brought in and what was your mandate?

Zharskiy: AliExpress is one of our long-standing clients. We had previously advised them on a range of other issues, including regulatory, compliance, and financial matters, but this was the first corporate deal we have worked on together. Our team was involved from the very beginning, as the exclusive legal counsel to AliExpress for this deal. As such we oversaw and prepared all the transaction documentation enabling the client’s expansion of its presence on the Russian market.

CEELM: Please give our readers a bit of context. What do you believe was the rationale behind the deal? Why did it make sense for your client to buy the 30% stake?

Zharskiy: In my view as external legal counsel, KazanExpress as a target company was a prospective and dynamic start-up, attractive for investment from market players. KazanExpress has a strong presence in Tatarstan and the surrounding regions in Russia. The deal would allow for KazanExpress suppliers to be brought onto the AliExpress platform. I believe the investment would contribute to our client’s strategy of achieving a leading position among electronic platforms.

CEELM: AliExpress Russia, your client, is a joint venture between China’s Alibaba Group and Russia’s MegaFon, Mail.ru Group, and the Russian Direct Investment Fund. Do you find advising a JV is different from advising a straightforward company? Without going into details, were there differences of opinion between the JV partners and, if so, how were they overcome?

Zharskiy: We only worked with the management of the JV company so there were no differences of opinion to be overcome. I’m not sure of the extent to which the JV partners were involved in the deal.

CEELM: According to KazanExpress’ counsel, “the investment will help the company expand its logistics platform, supporting its active expansion from 33 to 127 cities in the European part of Russia.” In light of that expansion drive, what were your particular focuses on, as advisors on the deal? Were you merely focused on maximizing capital, or were there other terms your client found critical to settle on, that facilitated this mission?

Zharskiy: The deal was not as simple as you would imagine. As the target company has a development strategy which requires a lot of investment, special attention was paid to the structuring of shareholder relations and to reflecting different potential outcomes in the transaction documentation.

CEELM: What aspects did you find to be most challenging in this deal?

Zharskiy: Due to the very dynamic nature of the market, we were always in a rush to catch up to and include the most recent developments. The business side frequently ran ahead of negotiations, documentation, and final agreements.

Overall, the deal should have been completed within a short time frame, and the advisors’ goal was to not be late with the documentation. It was not possible to put either business on pause, so we had to run to keep up to speed. 

CEELM: On the flip side, what went rather smoothly relative to expectations?

Zharskiy: Working together with the many parties involved was surprisingly smooth. I believe this was very important. We do have experience with multiple types of clients on M&A, but I appreciate and would highly endorse the AliExpress in-house team. The client-side decision-making process on key issues – important because of the tight timeline and changes in the target company – was fantastic. They were able to run, process, and negotiate issues, all the while making reasonable business judgments on the transaction. And it was the same on the sell side, a reasonable approach by all categories of shareholders – founders, management, investors – despite a mixture of differing interests.

CEELM: If you had to point to one, what would you say was the single most important factor contributing to the success of the deal?

Zharskiy: Timing was the main factor for success – it couldn’t be wasted, and it was important for the parties to close the deal quickly with the help of their advisors. It was crucial since, if the target company would not obtain financing at the appropriate times, its business could be disrupted. Thus, it was important for both sides to set up clear rules and answer some difficult questions.

CEELM: In your view, what is the significance of this deal for the Russian market?

Zharskiy: The deal supports the development of the e-commerce sector in Russia.

This Article was originally published in Issue 8.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Framework Agreements (FAs) are like swimmers on a mixed medley relay. Each one does something different and it can be hard to understand what is going on. They are nevertheless used in many cross-border transactions in Russia, so here is an A-to-Z checklist to consider when negotiating FAs.

Arbitration. Refer disputes to private arbitration, rather than English courts, for better global enforcement rights (including in Russia).

Bilingual. They don’t need to be bilingual, usually. If they are bilingual, state that the English language version prevails.

Coordination. Coordinate the sequencing and timing of transaction steps carefully and accurately, while leaving some room for error and delays, in particular if Russian administrative procedures are involved.

Default. Consider what termination rights for cross-defaults in other project agreements are appropriate, what remediation processes are fair, and what impact this might have on third-party relations, in particular if Russian public procurement is concerned.

Entire Agreement. Ensure that the parties should not be able to sue each other based on marketing speak.

Force Majeure. Provide that the parties cannot face liability for failure to perform based on issues arising from pandemics, Russia-related sanctions, and other force majeure events.

Guarantees. Consider what security for counterparty obligations you require and which parent or beneficial owners can best provide them.

Hierarchy. If there is any inconsistency between the terms of an FA and another project agreement, consider which should prevail, in particular if local arrangements are mandatorily governed by Russian law.

Indemnification. What key risks do you want to make the other side responsible for? Can they be enforced in Russia? 

Joint Steering Committee. Consider what committee(s) should run the project and what powers they should have (not the power to amend contracts, usually).

Know-how. Think about who will own and/or receive licenses for all know-how and other IP rights for new technology, and how such rights will be protected or registered in Russia.

Limits on Liability. What limits on aggregate liability are appropriate for the parties?

Materiality. Arbitrating disputes and then enforcing arbitral awards in Russia is expensive and time-consuming. FAs are more appropriate for high-value projects.

Non-Compete Clauses. Do you need these to protect know-how and trade secrets? Russian law limits the use of non-compete arrangements.

Out of Court Resolution. Do you want to build in an escalation process before disputes can be initiated? Sometimes these hinder enforcement.

Payments. USD, EUR, RUB, Bitcoin? Cross-border or local Russian bank transfer? Alternatives if exchange controls or Russian sanctions are implemented? Who takes any tax gross-up risks?

Qualification. If training and technology transfer is required, who pays for it, how many people hours are required, and who determines whether it was completed? How does this interact with Russian state inspections and licensing requirements?

Restructuring. English law FAs can be useful tools for implementing restructurings of debts owed by or to Russian groups. Debt write-downs and equity swaps, waivers, amendments, settlements, and standstills are common.

Subrogation. Should the subrogation rights of guarantors to recover amounts paid on behalf of other parties be included?

Termination. Under what circumstances does termination occur and what do the parties need to do upon termination? Would the Russian authorities need to be notified of the termination?

Un-Winding. How and under what circumstances is the transaction unwound? What happens if completion has partially occurred and some assets have already been transferred over? Will the Russian registration authorities require to re-transfer any registered property or rights back to the original owner?

Variation. There is always a risk that oral discussions or email exchanges will have the effect of varying a contract, but the parties can try to reduce this risk by inserting express wording to the contrary.

Warranties. Warranty claims won’t always lead to full compensation (both under English or Russian law), but they can prompt disclosure.

Execution. Execution as a deed is often advisable – not all parties may be giving consideration. Ensure all Russian corporate approvals are obtained – the transaction can be invalidated if not. If any Russian individuals are signing in their own capacity, certain additional checks are advisable.

Yield. Pay careful attention to financial formulae and expressions. Mistakes may be punished. Don’t get lost in translation.

Zip Codes. The same applies to notices provisions. Don’t hand out get-out-of-jail-free cards to the other side. Consider the practicalities of cross-border mail services to Russia and the relative convenience of email.

Andrew Robinson, Counsel, and Torsten Syrbe, Partner, Clifford Chance

This Article was originally published in Issue 8.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

A carve-out of a business unit or a product portfolio may be required to optimize internal business processes or as part of a transaction on the sale of a business.

The first key task of business separation planning, irrespective of jurisdiction, is establishing the deal perimeter. Depending on the specific assets to be separated, several legal options can be considered in Russia to implement such a carve-out.

Corporate Spin-off: Corporate reorganization in the form of a spin-off is a highly Russia-specific legal scenario for the separation of a business. Although relatively formalistic, the procedure envisages universal succession – it allows almost all types of assets and liabilities to be transferred.

That being said, regulatory approvals (licenses, product certificates, etc.) cannot be transferred as part of a corporate spin-off. Given that in the process of a corporate spin-off a separate entity is established on the same date that the business is transferred to it, the new entity will have a licensable business from the date of incorporation, but it will not hold a license to run it for about four to six months. Therefore, the transfer of a licensable business or regulated products requires more careful planning, to avoid business interruption upon completion of the corporate spin-off.

A key advantage of corporate spin-offs is that, in most cases, no counterparty consent is required for the transfer of contracts or the transfer of employees.

It should be noted that the procedure of corporate reorganization was not historically designed for the sale of a business and accordingly it is more suitable for internal restructurings. The key documents of a corporate spin-off are corporate resolutions and a transfer certificate – there is no sale-and-purchase or business transfer agreement, and no purchase price is paid for the assets that are being transferred. But that can be managed by introducing more steps to the deal structure in the case of third-party transactions.

The timing of a corporate reorganization is driven by statutory requirements. In practice, they tend to take at least five to six months, but, in the case of complex restructurings, the process may last 10 to 12 months.

Asset Sale: An asset sale is often used as an alternative to corporate reorganization when a regulated business needs to be carved out. Under an asset sale, the regulated business can either be transferred to an existing company that holds the necessary license or a new entity can be incorporated as the future separated holder of the business – and a license in the name of the new entity is applied for before the transfer of the business.

Unlike under corporate reorganization, the transfer of contracts as part of an asset sale generally requires counterparty consent. Therefore, in addition to the master asset sale agreement, bilateral or tripartite assignment agreements with counterparties may be required. Employees’ consents to the transfer are also needed.

The timeline of an asset sale is more flexible than in the case of a corporate reorganization. The duration of the process is mainly dependent on the number and types of assets. However, in the case of third-party transactions, merger control approval may also be required, which generally takes around six months to obtain.

Contribution of Business: Under Russian law, a limited number of assets can be contributed to a Russian company’s share capital or assets. No contracts apart from IP license agreements can be contributed. Contribution to a company’s share capital requires special attention if the net assets of the recipient entity are low. Unlike in the case of corporate spin-offs and asset sales, it is necessary to procure an external valuation of the assets to be transferred as part of the business contribution. A contribution to assets requires no consideration. Contribution to share capital is made in exchange for equity.

Sale of Enterprise: The transfer of a business as a going concern is often discussed at the stage of transaction planning but is not used in practice due to an inherent lack of flexibility. It is regulated as the sale of an enterprise under Russian law. The enterprise is deemed to include immovable property, equipment, materials, finished products, accounts receivable, accounts payable, and IP. The enterprise must be registered as an item of real estate to be transferred.

Russian carve-outs are often more time-consuming and formalistic than in Western Europe. Global templates can hardly ever be used without substantial adjustments. However, all procedures are manageable and can be handled smoothly if the Russian specifics are closely taken into account from the outset.

By Ekaterina Sharapova, Senior Associate, and Torsten Syrbe, Partner, Clifford Chance

This Article was originally published in Issue 8.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

Despite the severe damage inflicted by COVID-19 on the Russian economy, the government and businesses have agreed that the local IT sector needs state incentives and support. Calls for accelerated development and state support for the local IT sector were among the main messages of several state agencies when the Russian president and government announced a series of tax benefits for the IT industry.

Large-scale tax benefits for Russian IT companies were introduced on January 1, 2021, to create conditions for the development of domestic high-tech companies and increase the attractiveness of the Russian jurisdiction for international IT companies. First, these measures imply the provision of income tax benefits to two categories of companies working in the IT industry: Russian IT firms that develop and implement software, provide services for modification, adaptation, installation, testing, and maintenance of software and databases, as well as IT companies, which design and develop electronic component database products and electronic products. For such companies, the income tax rate was reduced from 20% to 3%. Similarly, social contributions were also reduced from 14% to 7.6%, an incentive aimed at easing the fiscal burden of wages on IT companies. These benefits are available to both Russian IT companies and local subsidiaries of foreign international or multinational businesses operating in the country.

As a tradeoff for these incentives, there is a limitation of the VAT exemption on the provision of exclusive rights and software licenses. Now, the exemption applies only to software that is included in the so-called Register of the Russian Software. Along with Russian businesses, the exemption is also available to local subsidiaries of foreign companies, but the latter’s shares in such local businesses should be less than 50%, while their revenues from licensing the software abroad should not be more than 30%.Companies that specialize in R&D operations are waiting for the expansion of the reduced income tax rate to their revenues, as the Russian IP Agency had recently expressed its intention to facilitate the provision of these tax incentives to all companies that generate income from their intellectual properties.

Together with the existing tax incentives for start-ups through the Skolkovo Innovation Center, the Russian IT sector is fully equipped with substantial fiscal stimulus, which makes it a prospective sector for investment.

This snapshot would not be complete without a review of international taxation practices, as Russia plans to be on par with global trends. Since Russia is striving to establish the most advanced tax practices, there are ongoing discussions and plans for it to join the OECD’s new taxation standards for digital businesses, thus adopting a single supranational minimum income tax rate. A final decision has not been taken on this issue and how it will work with the above incentives has yet to be defined. Russia has also consistently called on international IT companies to comply with its local data protection rules. As a step to strengthen its ability to monitor the localization of Russian users’ data, the government has adopted a law that requires foreign online companies with significant local users (defined as 500,000 or more Russian users per day) to have a physical presence in the country, effective from January 1, 2022. The law affects social networks, messengers, gaming services, search engines, online shops, hosting providers, advertising platforms, e-mail services, and several others.

Liability measures have been established for companies that do not have local official representative offices in Russia. Some of these measures are, comparatively, less stringent, such as informing the users of those companies’ resources about a violation of the Russian legislation by foreign entities. Other measures, on the other hand, prescribe quite severe penalties, for example, a complete blockage of the foreign entities’ resources in Russia.

Accordingly, companies that meet these conditions should be allowed to operate or be represented in Russia. In addition, an electronic form should be created on such companies’ official corporate websites to receive requests from Russian users. Moreover, such companies should register a personal account on the official website of the Russian agency responsible for Internet control, in order to receive requests/appeals from Russian state agencies.

By Olga Odintsova, Tax Counsel and Head of New Business and Product Development, CMS Russia

This Article was originally published in Issue 8.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.