In a Word

Early Repayment of Consumer Loans

Oct 7, 2011:

Russian law, speaking generally, does not permit a borrower to pay a term loan early. A loan agreement may give such right ‘without premium or penalty’ yet as a rule early repayment needs a creditor’s consent. Banks do not like prepayments because if there are no credit problems they cut short the life of an attractive asset. Quite often, therefore, a loan agreement requires an additional premium to a bank in the event of prepayment.

The Russian Parliament has adopted a law allowing borrowers to return a loan early without creditor’s consent. The law amends articles 809 and 810 of Russia’s Civil Code.

Now individuals have the right to repay consumer loans ahead of time regardless of the lender’s consent. A borrower just needs to give the lender a 30 days notice to terminate the loan agreement. There is no penalty or premium. Interest is payable until the day of loan repayment.

The law operates retrospectively and applies to contracts already in force. The law does not apply to business loans.

eDocuments are Legal

Oct 6, 2011:

Russian Tax Authorities have confirmed that documents in electronic form with digital signature do not differ from those on paper for accounting and tax purposes. A digital contract, receipt or invoice are absolutely fine.

It’s Now Official: Compound Interest is Bad

Oct 5, 2011:

The Supreme Commercial Court declared charging interest on interest illegal.

Compound interest is one of the most treacherous things that sail the financial waters. It is also an effective instrument of putting pressure on non-performing debtors. Though per se compound interest is neither good nor bad, usually it signifies the beginning of the end.

Banks often add interest to the principal so that the interest which has been added also earns interest. In a typical situation a lender simply extends an additional loan to a struggling debtor to pay off the debt and interest and penalties, and from this moment the borrower pays interest not only on the original loan but on the interest and penalties.

The Supreme Commercial Court has ruled that banks have no right to force borrowers to pay interest on overdue interest. Interest may accrue only on the principal. When a borrower defaults the bank cannot, on its own initiative, extend a new loan and charge interest on the increased amount. The part of a loan agreement authorising the creditor to do so is now illegal and void.

The ruling concerns consumer credit.

Former Yukos’s Senior Lawyer Dies

Oct 3, 2011:

The former head of Yukos’s legal department Vasily Aleksanyan has died at his home in Moscow.

Until a certain point his career was skyrocketing. Aleksanyan was one of first Russians who did law at Harvard. He soon became the head of the legal department of a British investment group. In 1996, he landed himself a job as a senior lawyer in then Russia’s largest oil company.

In April 2006 his fortune turned upside-down. He was arrested on charges of embezzlement, money laundering and tax evasion.

He never admitted to the crime. He said that the arrest was based on false testimonies taken under pressure from his former subordinate Svetlana Bakhmina, a mother of two imprisoned two years earlier.

In custody his condition rapidly deteriorated. HIV positive, he became almost blind, got liver cancer and tuberculosis. Despite his medical condition demanding urgent antiretroviral treatment and chemotherapy, his bail request was denied.

Only three years later, after an unprecedented international pressure, he was freed. The European Court of Human Rights ruled that Aleksanyan had to be released immediately and without bond. Twenty days later he was released, after $2 million bail was paid.

Antimonopoly Service's New Initiatives Against Oil Majors

Sep 30, 2011:

The head of Russia’s Antimonopoly Service suggested splitting up vertically integrated oil supermajors into retail, wholesale and production. However, there is no need to rush: the government must take time to prepare the reform. In the meantime, a company’s presence must be restricted to 35% market share in any subject of the federation.

Igor Artemyev also said that the competition watchdog supports participation of wide society, civil organizations and individual activists, in monitoring the retail prices of petrol. The organization, he said, would encourage general public to take part in lawsuits against oil companies which raise prices on petroleum products.

Igor Artemyev was speaking in the Federation Council, the upper house of the Russian Parliament.

No Need to Beg

Sep 30, 2011:

A commercial court has frozen a bank account of the Moscow Tax Inspection #2 because it did not return overpaid taxes to Factoring Company Eurokommerz Ltd. It's incredible. Usually, if the government owes you money (and you have a court’s decision which confirms the fact), but taxmen nevertheless do not pay, all you can do is to kneel and beg.

Stop These PPPs

Sep 29, 2011:

New head of St. Petersburg Georgy Poltavchenko decided to stop a number of PPPs started by ex-governor Valentina Matvienko. New government believes that the concept of public-private partnership was used as a smokescreen to hide the sheer size of public spending.

First of all, development of the Orlov tunnel, so cherished and praised by Matvienko, will be closed. Initially, it was announced that the project would cost $1.6 billion but with time the figure nearly tripled to more than $4 billion. And this means, says the new vice-governor Sergey Vyazalov, ‘that this is not a good project’.

Also, construction of two bridges across the Neva River and the Palace of Arts on Vasilevsky Island will be terminated. 'We need to look at the obligations the city takes’, says Sergey Vyazalov. ‘We don’t want our future budget serve just one purpose, repayment of debt. It is better to give up something now than to have problems later.’

Putin Plans Tax Hikes for Wealthy

Sep 29, 2011:

The number of Russians living in poverty has increased by two million people, says the state statistics agency Rosstat. Every eighth person in Russia is poor. This is a staggering development, taking into account that in the first half of 2011 prices of oil and raw materials, the main sources of the country’s revenue, were exceptionally high.

Moreover, according the Rosstat’s data, the per capita income grew by 14%. This suggests that the ranks of the poor are rapidly replenished by the middle class. Meanwhile the rich get richer.

Last Saturday Vladimir Putin said that he would impose higher taxes on wealthy if elected to a third term as president next year.

‘Taxes for people with high incomes, for the rich - and we have more and more of these people - should be higher than for the middle class, the majority of citizens,’ he said.

It seems, however, that foreigners working in Russia have nothing to fear. Higher taxes for the wealthy will fall ‘primarily on consumption, real estate and property’, said Vladimir Putin. Russia should keep its flat 13% income tax rate because such tax is easier to collect, he added.

Putin also said that taxes for companies that exploit natural resources and sell raw materials should be higher than for companies engaged in innovation, building new plants or manufacturing.

His Old Friends

Sep 28, 2011:

All of a sudden German Gref, the head of Russia’s largest credit institution Sberbank, while in Singapore, announced that he ‘did not have any plans to work in government’. It is baffling why he would say this because it is unlikely that such a proposal would ever be made.

German Gref and Alexey Kudrin, who lost his job as Finance Minister two days ago, are like-minded people. They created and tried to carry out economic reforms of the early 2000s. And, despite minor differences, their views on the economy are practically identical.

Incidentally, the Central Bank chairman Sergei Ignatiev also hastened to declare that he did not receive a proposal to head the Finance Ministry.

So far it is unclear whether the old guard simply lost the touch with the Kremlin or they decided to show solidarity with the former colleague and stay away from President Medvedev who promises both generous spending and tax cuts.

Ridicule as a Legal Technique

Sep 28, 2011:

BP has put on hold a hi-tech project worth $8 million with the fund Skolkovo headed by TNK-BP co-owner Viktor Vekselberg. The company says it fears that it may be accused of breaching a shareholder agreement with its Russian venture TNK-BP.

Earlier this year, the AAR consortium, which represents BP's Russian partners in TNK-BP, stopped a $16 billion share swap and Arctic shelf development deal between the British oil major and Russia's leviathan Rosneft saying that the deal broke TNK-BP's shareholder agreement under which all projects in Russia must be carried through TNK-BP.

BP was expected to finance a three-year research project “Heat transfer and catalysis” on a parity basis with the Skolkovo fund, but at the last moment refused to sign the deal. The company referred to the same shareholder agreement with TNK-BP, an instrument previously used by the joint venture's Russian shareholders to block BP's deal with Rosneft.

Whether the R&D project contradicts the TNK-BP shareholder agreement is a big question. What seems likely is that BP, flooded with legal suits following its failure to strike the deal with Rosneft, wants to hold up the whole situation and Viktor Vekselberg personally to ridicule and win the attention of the country leaders, who see the Skolkovo fund as an illustration of Russia’s modernization ambitions.