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Direct ban imposed on setoff of obligations owed to creditors and company shareholders from “unfriendly” states

legal updates
29 / 03 / 2024


Decree of the President of the Russian Federation of 5 March 2022 No. 95 has imposed restrictions on the performance by Russian companies of their obligations under loans and credit facilities (and financial instruments, including equitiesArticle 2(1)(22) of Federal Law No. 39-FZ dated 22 April 1996 "On the securities market", answer to question 17 of Letter of the Bank of Russia No. 12-4-2/3652 dated 16 May 2022 "On the application of Decree No. 95") owed to foreign creditors from “unfriendly” jurisdictions.
Subsequently, similar restrictions were imposed by Decree of the President of the Russian Federation of 4 May 2022 No. 254 on Russian companies distributing profits to their participants from “unfriendly” jurisdictions.

The general rule is that such payments in excess of RUB 10 million per month (in the aggregate for all claims) are to be made to a special “type C” account opened for a foreign creditor or participant, unless the Russian paying company obtains separate permission from the Ministry of Finance of the Russian Federation or the Bank of Russia in order to discharge the obligations/pay profits without following such special procedure.

Historically, paying companies were uncertain whether such restrictions apply to non-money settlements with non-residents (e.g., by setoff) that do not involve a direct transfer of the resident’s funds to the non-resident’s accounts.

The Bank of Russia clarified previously, including on its official website, that the discharge by the setoff of obligations owed to residents of unfriendly states does not require permission from the Ministry of Finance of the Russian Federation.

However, later on the Bank of Russia changed its position and issued several private clarificationsFor example, Letter of the Bank of Russia of 31 August 2023 No. 08-12-4/8271 saying that discharge by setoff also requires clearance from the Ministry of Finance of the Bank of Russia.

No official (public) clarifications on this issue have been published by the Bank of Russia, but the positive clarifications described above have been removed from the Bank of Russia’s website.
According to unofficial information, the Ministry of Finance of the Russian Federation did not have an articulated position on this issue.

In practice, many companies continued to discharge by setting off their obligations owed to residents of unfriendly states (including dividends/profits), and the authorised banks approved such transactions while reporting the setoff to the Bank of Russia. We were not aware of any consequences of such notices given to the Bank of Russia or of the payers being held liable.

This may have been due to the fact that formally no special liability is established for violating the Decrees of the President of the Russian Federation, and the government authorities have not yet formulated an approach whereby persons violating Presidential Decrees may be held liable under the existing laws.

What has changed?

The Bank of Russia has issued official clarification No. 1-OR “On the clarification of the procedure for applying the provisions of Decree of the President of the Russian Federation of 5 March 2022 No. 95 ‘On the temporary procedure for the performance of obligations owed to certain foreign creditors’ while discharging obligations” dated 22 March 2024, which was published on the Bank of Russia’s website.

According to this clarification, if a Russian resident performs, unilaterally or under an agreement with a person of an unfriendly foreign state, any acts or transactions resulting in the discharge of the Russian resident’s obligation owed to a person of an unfriendly foreign state without the amount of consideration owed being credited to a type C account, but at the same time the resident is obliged to provide some other consideration (including by discharging the reciprocal claims, e.g., by setoff, by paying a break fee, or by fulfilling a novated obligation), this may only be done with permission granted by the Bank of Russia or the Ministry of Finance of the Russian Federation.

Therefore, the Bank of Russia expressly states that it is inadmissible to discharge obligations owed to residents of unfriendly states by setting them off against reciprocal obligations owed to Russian residents.

Clearly, this prohibition applies not only to loan and credit obligations, but also to profitDecree of the President of the Russian Federation dated 4 May 2022 No. 254 establishes that the procedure established by Decree of the President of the Russian Federation dated 5 March 2022 No. 95 is applied to the payment of LLC profits distribution obligations of LLCs and dividend obligations of JSCs.

Given the fact that the document issued by the Bank of Russia is an official clarification (labelled “OR”), it is to be expected that in the future Russian banks will refuse to allow residents to set off the obligations described above.

We have significant experience in obtaining the necessary permissions from the Ministry of Finance of the Russian Federation and will be happy to assist you in this regard.