Diversification of Russias banking sector following
the countrys accession
to the World Trade Organization (WTO) last week will be
constrained by raising global capital requirements.
But a better boost for the industry will come in six
months time, when standard loan documentation under Russian
law is expected to be introduced.
While Russias new WTO-status will have a great
impact in areas of commerce involving the cross-border flow
of goods, Basel III and Dodd-Frank capital constraints mean
financial services will miss out.
A greater source of hope for banking reform is the rewrite
of Russias Civil Code and subsequent introduction Loan
Market Association (LMA) style documentation. The overhaul of
the Code the countrys cornerstone business rules
was originally slated to take effect next month,
however this has been pushed back to year-end.
The legislative amendments include recognition of the
security agent role, lifting the ban on shared security which
has hindered syndicated lending in the country. Other
enhancements to syndicated lending introduced by the Civil
Code changes are charges over bank accounts, better
facilities for intercreditor agreements, and stronger
enforceability of loan agreement representations.
Even with these changes, the countrys banks knew
more was needed to improve the confidence of international
banks in Russian financing structures. Apart from the
purely legal problems, there is no LMA-style common
standard, said Oleg Khokhlov, a finance partner with
Goldtsblat BLP in Moscow.
This should change by January 2013. A committee of Russian
regional banks and international law firms has been working
since the start of the year to introduce standard loan
The idea is to incorporate all the protections we
expect from the new Civil Code, and create an economic effect
as close as possible to the LMA, said Khokhlov.
The committee has been organised under the legal group
within Association of the Russian Regional Banks, and is
informally branded the Russian LMA.
"At the moment every bank and law firm has its own
documentation, which is broadly based on the LMA. Therefore,
it will be beneficial for the market to have some common
standard documents and have common ground at least with the
boilerplate provisions," Khokhlov said.
Many banks interested in the product are local
subsidiaries of foreign banks including BNP Paribas, Deutsche
Bank, EBRD and Unicredit. The Russian LMA would help them
participate in local syndicates.
At present, Russian-law syndicates sidestep restrictions
on security-sharing by designating a joint and severable
creditor. Similar to the parallel debt structure used
elsewhere in Europe, this structure, uncertainties remain
over its enforceability, meaning caveats must be given on
legal advice regarding the structure.
The banks accept it, but still there is an element
of risk, said Timothy Stubbs, head of Salans
Russian finance practice. Creation of a security agent role
under the amended Civil Code would help here.
Standard documentation would also help Russias state
banks agree on syndication terms. Although they are the
biggest players in the countrys syndicates, their
complex decision-making structures make it difficult to
receive deal signoffs.
Capital constraints aside, another factor deterring
foreign investment in Russias banking sector
even post-WTO-accession is the countrys
lingering risk-premium. This is even despite its strong
"Even though there are a lot of opportunities,
particularly in the retail sector where there is a lot of
money to be made by developing banks' consumer banking
businesses, the general perception is that Russia is still a
very risky place to invest, said Stubbs.
Russian investors are successfully taking advantage of
these possibilities, but the limited impact of WTO-membership
on foreign investment in financial services is considered a
It could have helped unify the fragmented market.
There are too many small banks, they need to
consolidate, said Stubbs. It would also have
transferred some of the Western know-how that is also in
here for IFLRs full coverage of Russian loan