Russian Federation

major macro economic indicators

(e): Estimate (f): Forecast

RISK ASSESSMENT

Deep recession

Due to the escalation of the conflict with Ukraine, with the invasion of the latter by the Russian military in late February 2022, and the resulting harsh sanctions adopted by Western countries, the Russian economy will turn again into recession after the recovery experienced last year. Sanctions include sanctioning and removing selected Russian banks from the international communication tool SWIFT, freezing the Russian central bank's foreign currency reserves (mostly held in Western accounts), the U.S. ban on engaging in any transaction involving Russia's central bank, prohibiting the trading of Russian sovereign debt, restricting Russia’s access to foreign capital, freezing assets and forbidding travel for selected Russian public officials and oligarchs, sanctioning Russia’s energy and defence sectors, withholding the Nord Stream 2 certification, controlling exports of high-tech components to Russia, and closing the EU airspace to Russian aircraft, among other measures. These sanctions put considerable downward pressure on the Russian rouble, which has already plummeted, and will drive a surge in consumer price inflation. The higher level of inflation will erode of Russian consumers’ purchasing power, resulting in a real decline in private consumption, the traditional growth driver (50% of GDP). The Russian central bank already raised its key interest rate to 20% (from already a relatively high level of 9.5%) on 28 February 2022 in an emergency move, and could increase it even further to fight the rouble depreciation and elevated inflation. Higher financing costs and the deteriorated sentiment will add to inflation to limit household spending and business investment. Concomitantly, public investments have not been accelerating in recent years and they are currently expected to be put on hold.

On the other hand, the Russian economy could benefit from higher prices for commodities, especially for its flagship exports, i.e. natural gas and crude oil. However, EU countries announced their intention to limit their imports from Russia. If it were the case, this would result in weaker demand and softer prices, especially as their immediate needs will be decreasing, with the end of winter season approaching. This negative trend could be reinforced should Russia decrease or stop pipeline flows to Europe as a counter-sanction. In the industrial sector, restricted access to Western-produced semiconductors, computers, telecommunications, automation, and information security equipment will be harmful, given the importance of such inputs in the Russian mining and manufacturing sectors. Moreover, even before implementing these official formal restrictions, various Western companies have decided to stop or limit their activity in the Russian Federation. 

To try to limit the impact, Russia will probably want to deepen its trade relations with China, already the main market for its exports and imports. However, China’s purchases would not compensate (by far) for a drop of natural gas supplies delivered to Europe. Closer ties with China could lead to a wider usage of the Chinese CIPS (Cross-Border Interbank Payments System) as an alternative to the SWIFT, which would partially compensate for the lost access to the latter. Major Russian private and state-owned institutions (including Gazprom) have already been accepting yuan payments in recent years, but to a limited extent. Finally, the Russian domestic payment system SPFS (System for Transfer of Financial Messages) could see a wider use to substitute for SWIFT.

Initially strong public accounts will not suffice to save the economy

Oil and gas revenues remain an important source of proceeds for Russia. Their share accounted for 36% of last year’s total public revenues, while crude oil, natural gas and their by-products constituted 49% of Russia’s total exports. Compared to most other mineral-rich emerging countries, Russia has built up relatively strong financials, with a low level of public external debt, its recurrent current account surplus, and the accumulation of a fair share of its minerals revenues in the National Welfare Fund, as well as substantial foreign reserves (around USD 640 billion). However, the freeze promptly imposed by western depositary countries on the latter prevents the Russian central bank from deploying them and reduces the effectiveness of the Russian response to limit the deterioration scale, and especially the rouble plunge. 

Over the last years, Russia has been reducing its dependence on the US dollar in favour of the euro. As a result, at mid-2021, reserves in USD accounted for 16% of the total, EUR 32%, GBP 7%, while yuan (CNY) was at 13%. Gold reserves represented 22%. In order to offset the impact of sanctions, capital control measures have been implemented with a ban on FX transfers, including servicing FX loans outside the country. Russian exporters are also obliged to sell 80% of their foreign currency revenues. Moreover, the Bank of Russia banned coupon payments for foreign investors holding rouble-denominated sovereign debt, while Russian companies are also barred from paying dividends to their overseas shareholders. This comes on top of a temporary ban on selling Russian assets by foreign investors to reduce the money outflow out of the country. Additionally, the Russian government has ordered the finance ministry to spend to 1 trillion roubles (USD 10.3 billion) from the National Wealth Fund to buy shares in Russian companies. 

 The economic deterioration could lead to wider protests

As of December 2021, polls showed that about 38% of Russians did not consider war with Ukraine a real possibility, according to Levada Center polling. Another 15% completely ruled out the possibility of armed conflict. In February 2022, 71% approved the activities of Vladimir Putin as the President of Russia compared to the 61% in August 2021. 

In July 2020, a nationwide vote ratified constitutional reforms proposed by President Putin. They encompassed promises of increased state support for citizens and, most importantly, an amendment allowing President Putin to run for the presidency again in 2024 and stay in power until 2036. They also included giving presidents lifetime immunity from prosecution. The parliamentary election in September 2021 preserved the constitutional majority of the ruling United Russia party (49.8% of the votes; 324 seats/450). However, the Communist Party came a strong second, with 18.9% of the votes. 

However, with the escalation of the conflict, protests took place in several cities across Russia, despite arrests. The negative effects of sanctions, such as higher inflation, eroding purchasing power, the country’s isolation, and expected weaker consumer sentiment, added to the lack of structural reforms, could trigger further social discontent and protests.

Last updated: March 2022

Payment

Bank transfers in Russia are among the most popular instruments used for non-cash payments, for both international and domestic transactions. This is because they are fast, secure, and supported by a developed banking network. Despite this, cash is still one of the most widespread payment instruments used by individuals.

Debt collection

Amicable phase

The amicable phase begins with the creditor contacting the debtor, either via written correspondence or phone calls. If an agreement is reached, a payment plan can be offered to the debtor. Charging interest is legally allowed but hard to enforce unless an agreement to pay said interest currently exists between the debtor and the creditor. Any such agreement must be additional to any standing agreement between the parties.

Legal proceedings

The Russian judicial system is comprised of three branches: the regular court system, the arbitration court system (headed by the Supreme Court), and the Constitutional Court (a single body with no courts under it; in Russian constitutional law this function is known as “constitutional control” or “constitutional supervision”, and deals with a certain number of disputes where it has original jurisdiction).

The regular courts have a four-tier hierarchy and are responsible for civil and criminal cases: the Supreme Court of Russia, regional courts, district courts, and magistrate courts.

Arbitration courts review cases dealing with a wide matter of contractual issues, such as rights of ownership, contract changes, performance of obligations, loans, bank accounts and bankruptcy.

The highest court of appeal is the Supreme Court of the Russian Federation.

Fast-track proceedings

Russian law provides for simplified proceedings for certain types of cases, in which the creditor seeks to recover no more than RUB 500,000 from a legal entity or RUB 250,000 from an individual entrepreneur. Under Russian law, judges are to consider cases through simplified proceedings within a maximum of two months form the day when the Arbitrazh (arbitrage) court receives the statement of claim or application. Once the deadline for submissions of evidence has passed, cases are reviewed on their merits by judges, without the parties being called to appear.

Ordinary proceedings

Proceedings are initiated when a creditor files a statement of claim with the competent Arbitrazh court. The court must decide within five working days whether to accept the statement, and subsequently schedule a preliminary hearing. Debtors are usually notified of claims when they are served with a copy of the statement of claim, which includes the data of the initial hearing. There is no specific time frame during which defendants must submit their defense, but it must generally be done before the hearing on the merits). The court can set a deadline for submitting a statement of defense – if this is not submitted, the court will consider the case on the basis of the available materials. The preliminary preparation period ensures that the case can be resolved on its own merits during one court hearing. Cases must generally be resolved on their merits within three months after the respective statement of claim is received by the court. More complex commercial disputes can take considerably longer. The courts will normally award remedies in the form of compensatory damages or injunctions but punitive damages are not available.

Enforcement of a Legal Decision

A judgment is enforceable for three years provided that is has become final. If the debtor fails to satisfy the judgment, the creditor can request compulsory enforcement of the judgment from the court’s bailiff services. Foreign judgments must be recognized as a domestic decision by the Arbitrazh Court

through the Russian exequatur procedure. Although Russia has signed a small number of reciprocal recognition and enforcement agreements with foreign countries, domestic courts are reluctant to recognize foreign jurisdiction clauses.

Insolvency Proceedings

Supervision

Commercial Courts initiate the supervision process to evaluate the debtor’s financial situation and to secure the debtor’s property. After examining a filed insolvency claim, the court initiates the supervision process. The debtor can autonomously request a court to initiate supervision if settling some creditors’ claims would make it impossible for the debtor to fulfil other obligations, if execution on the debtor’s property means the debtor’s business has to cease, or if the debtor’s business is insolvent. A receiver is appointed, known as a temporary manager, who must approve certain transactions during the supervision, such buying or selling more than five percent of the accounting value of the debtor’s property.

Financial rehabilitation

The aim is to carry out any necessary measures to restore debtors’ solvency and settle their debts. The court and the creditors control the process. The application must include a rehabilitation plan that ensures the debtor’s obligations will be met. The court appoints a receiver to be the administrative manager, who supervises and controls the debtor’s affairs during the period of the financial rehabilitation. The administrative manager examines the debt repayment schedule and monitors any financial restructuring plans.

At least one month before the period of financial rehabilitation expires, the debtor must provide the administrative manager with a report on the results of the financial rehabilitation. Once the report has been examined, the manager must prepare an opinion on the extent to which debts have been paid and the financial restructuring plan has been achieved. The opinion is submitted to the court, which examines the results and either ends the proceedings, orders external administrator to manage the company, or declares the debtor bankrupt.

External administration

The objective is to restore the debtor’s solvency by applying special measures under an external administration plan, and to replace the debtor’s chief executive officer (CEO) with an independent external manager. Once the procedure begins, the court appoints a receiver known as the external manager, who must draft an external administration plan setting out the measures necessary to restore the debtor’s solvency within the period of the external administration procedure. At the end of the period, the manager prepares and submits a report to the creditor’s meeting, together with a proposal of one of the following four options:

• end judicial proceedings, if all creditors have been settled;
• extend the period;
• end external administrator, as the debtor is now solvent;
• enter administration and file for bankruptcy.

Amicable arrangement

Debtors and creditors may make an amicable arrangement to adjust debtors’ liabilities on negotiated terms during any rescue procedures. Generally, an amicable arrangement ends the powers of court-appointed receivers. If a debtor fails to comply with terms of an amicable arrangement, creditors are entitled to ask for a bailiff to execute the agreement.

Insolvency

The purpose of insolvency is to sell the debtor’s property and use the proceeds to pay creditors’ claim in proportionate amounts. The court may initiate the process during supervision, financial rehabilitation, or external administration. It appoints a receiver (insolvency manager) to replace the debtor’s CEO. The court and the creditors control the activity of the insolvency manager, who must provide progress reports. At the end of the proceedings, the court reviews the list of satisfied and unsatisfied claims. If they are fully satisfied, the court rules the proceedings complete and the debtor is liquidated. If they are not satisfied, proceedings are terminated, the debtor company is dissolved, and unsatisfied creditor’s claims are to be written off.