In connection with the financial and political crises that swept Russia in August and September, the Russian government has adopted certain extraordinary measures, including the restructuring of the state's obligations under widely-held debt securities, and a moratorium on repayment of certain other hard currency debts. Creditor losses as a result of these measures are potentially enormous; by some estimates, in the hundreds of billions of dollars. Among other effects, the new measures have precipitated the effective collapse of the Russian banking system. From a legal perspective, the imposition of the measures has raised a host of issues, including the effective remedies available to bond creditors and the status of private debtor obligations in view of the moratorium.
Mandatory restructuring of state bonds
On August 17 1998, the Russian government and the Central Bank announced mandatory restructuring of outstanding GKOs (rouble-denominated zero-coupon treasury bills) and OFZs (rouble-denominated floating rate notes) maturing up to December 31 1999. These bonds will be replaced by new, longer-term debt securities as described below. Trading in the affected bonds has been suspended pending completion of the restructuring.
Subsequent legislation has partly clarified the terms of the restructuring, although many issues remained open at press time. By a September 18 deadline, bond holders were supposed to apply for early redemption. Five percent of the nominal value of the bonds would then be repaid in cash, and the balance swapped for new securities under one of two options to be chosen by the investor. These are:
- a new OFZ option. Under this option, the investor would receive a package of new rouble-denominated OFZs with terms of three, four and five years, paying interest at rates ranging from 20% to 30% each year, plus a dollar-denominated Eurobond (equivalent to 20% of the nominal value of the original bonds, converted to dollars at the exchange rate of 7.1456 roubles per dollar), maturing in 2006 with a fixed annual coupon of 5%; or
- Sberbank certificates of deposits. Under this option, the investor would receive certificates of deposit issued by the Savings Bank (Sberbank), which is majority-owned by the state and by far Russia's largest bank. Details of this option remained unclear at press time.
Investors who do not elect for voluntary redemption or otherwise cooperate with the mandatory swap scheme are generally supposed to receive the new OFZs when their original GKOs/OFZs mature. However, questions have already been raised about the legality of the forced restructuring plan under the Constitution, Civil Code and other legislation. These questions, and the advent of the new government headed by Prime Minister Yevgeny Primakov, have cast considerable doubt over the restructuring.
90-Day moratorium on repayments to non-residents
Also on August 17 1998, the government declared a 90-day moratorium on certain transactions classified as movements of capital or involving debt repayments to non-residents, until November 14 1998. Despite the questionable legality of this declaration, it was followed by more detailed Central Bank regulations on August 19 and 26 1998. Transactions suspended under the moratorium included:
- repayment of principal under loan obligations to non-residents, with terms exceeding 180 days (however, interest payments were not affected and could still be made on time);
- insurance payments in connection with loan transactions where securities have been pledged as collateral or repo transactions; and
- fixed-term foreign exchange contracts (as typically used by GKO/OFZ investors to hedge rouble devaluation risk).
The moratorium does not apply to Russian sovereign debt, external debts of the Russian regions or certain Russian government institutions (eg, the ministry of finance and the Central Bank), or debts to certain public institutions subject to special treaty protection, such as the European Bank for Reconstruction and Development (EBRD).
Russian banks are generally required to act as agents of the state for exchange control purposes, and thus to enforce the moratorium. However, it can be argued that the moratorium constitutes clear interference by the state with private contracts, and thus violates Russian and international law. Under Articles 4 and 422 of the Russian Civil Code, acts of civil legislation may not have retroactive effect, unless specified by a federal law. The actions of the government and Central Bank in imposing the moratorium are administrative in nature, and do not constitute a law. Consequently, it is expected that the moratorium, like the state bond restructuring, will provoke a substantial legal controversy which is only just beginning.
Sergei Zhestkov and Brian Zimbler