Russia loan standardisation timeline revealed

Author: Danielle Myles | Published: 29 Aug 2012
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Diversification of Russia’s banking sector following the country’s 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 Russia’s 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 Russia’s Civil Code and subsequent introduction Loan Market Association (LMA) style documentation. The overhaul of the Code – the country’s 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 country’s 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 documentation.

“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.

Syndication difficulties

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 Russia’s state banks agree on syndication terms. Although they are the biggest players in the country’s syndicates, their complex decision-making structures make it difficult to receive deal signoffs.

WTO shortcomings

Capital constraints aside, another factor deterring foreign investment in Russia’s banking sector – even post-WTO-accession – is the country’s lingering risk-premium. This is even despite its strong economy.

"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 pity.

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 demand.

Click here for IFLR’s full coverage of Russian loan standardisation