Market View: Greg Potts, Denton Wilde Sapte

A few years ago, one of the witty remarks addressed to lawyers focusing on Russia was that Russia essentially had no laws, and that was a major reason for its problems. Of course, for those in the know, a shortage of laws was never the problem. On the contrary, the Russian legal system was characterised by a myriad of contradictory laws, decrees, regulations and instructions, which made the practice of law in many cases simply a matter of educated and informed guesswork.

In recent times, the Russian legal market has settled down and, with one notable and high profile exception, there is far more certainty when dealing with Russian issues. This has been reflected in the increased tenors and reduced pricing of Russian trade-finance deals. This perception of stability has arisen because loans to Russian borrowers have been properly and regularly serviced and, in many cases, repaid far ahead of time as borrowers seek to re-borrow on more advantageous terms.

There have been a number of recent legal developments.

A new ‘subsoil law’ is expected to be introduced into the State Duma. This has generated publicity for a number of reasons, including the possibility that in certain cases only, Russian incorporated companies with a Russian shareholding greater than 50% will be able to participate in auctions for new licenses for strategic fields. Just to make the situation more complicated, there is an exception for offshore companies which are at least 51% Russian-owned. There is also a very broad ‘group of persons’ test in this context, based on the anti-monopoly legislation, that could raise uncertainties even for some corporate groups that are generally regarded as Russian. It is quite probable the draft will be submitted with this provision included, but how it will fare during the legislative process remains to be seen.

Another issue is how ‘strategic fields’ will be determined, with the ministry of natural resources (MNR) suggesting this should be settled by the security and defence authorities, rather than the MNR itself. Although the strategic fields proposal is controversial, a number of others are regarded as substantial improvements on the current legislation. This includes the introduction of a contractual regime for subsoil use, which will enable the relations between the state and the licensee to be governed by contractual mechanisms subject to civil law, rather than the existing administrative law licensing regime. Civil law is regarded as much more reliable for the enforcement of rights and obligations. In addition, the contractual rights will be assignable and subject to pledge, subject in each case to the permission of the MNR. As it will be possible for financiers to obtain some form of security interest over the contractual rights, this will help in project financing and reserve-based lending where there is a much greater reliance on the borrower’s reserves, future production and rights over the subsoil plot.

Meanwhile, a number of proposals have been put to the State Duma in the regulation of the derivatives market. Currently, all proposed legislation has been removed from the Duma while two separate working groups consider what is required. In the meantime, there is still an active derivatives market in Russia which operates within the constraints imposed by the lack of a comprehensive law. Given the importance of commodities to the Russian economy, and the political clout of the major oil, metals and gas producers it is difficult to understand why it has taken so long. One answer of course is that the big producers use offshore structures if they need to enter into hedging arrangements. The lack of clarity in Russia may be frustrating – and holding back many Russian companies from taking advantage of various derivative schemes – but is not a huge concern for the bigger players.

In December 2004, the State Duma passed the law on credit histories, which regulates the generation, keeping and using of credit histories and governs the activities of credit bureaux. The goal is to create a system of credit histories and credit bureaux for the provision of information on borrowers to lenders. The submission of information to credit agencies and access to such information held by them requires the consent of the borrower. It will be interesting to see how this develops. The confidentiality of such information is a big issue and the credit bureaux will be liable for the illegal use and unlawful disclosure of confidential information. Given that the taxation records of Russian taxpayers can be purchased in the streets and markets of Moscow, I suspect the majority of Russian borrowers would prefer not to provide information on their credit history to a third party credit bureau.

Greg Potts is senior solicitor at Denton Wilde Sapte in Moscow