The Projects and Construction Law Review - Russia.


Law Business Research

Progress towards establishment of a robust project finance market in Russia continues to be slow but discernable. The need for large-scale investment in the country’s infrastructure is a commonplace. The major state-owned banks are well capitalised and have a clear mandate to support the development of the market.

Russia remains an important jurisdiction from the perspective of the European Bank for Reconstruction and Development (‘the EBRD’) and other multilaterals. These institutions, along with local banks such as VEB, play a range of important subsidiary roles alongside disbursement of long-term finance. The areas in which they are active include promotion of the institutional change and development needed for delivering major infrastructure projects, dissemination of technical know-how and training, as well as promotion of the legal changes necessary for providing a sustainable framework for project financing.

Russia’s intricate legal system offers many challenges to the creation of a broad, deep market for project financing but also permits development of relatively localized solutions, as can be seen from the development of the St Petersburg market in this discipline.

The legal changes required for supporting the project finance market are, in certain respects, linked to the reforms in the country’s financial sector and system, for example, the pending changes to the Russian International Swaps and Derivatives Association and the potential for netting in an insolvency.

The year was dominated by the closing of three major financings in the infrastructure sector: Pulkovo Airport, the Odintsovo Bypass and the Moscow–St Petersburg Highway. Rightly or wrongly, the market does not necessarily see these transactions as a template for the future.

These transactions show that there is a strong appetite on the part of international developers but limited appetite on that of international banks, whose roles in these deals were restricted to advisory positions. The financing was predominantly provided by a combination of multilaterals and local state-owned banks, with some support, in the case of the Odintsovo Bypass, from the Russian government.

Pulkovo airport and the St Petersburg market generally offer a more positive perspective, with material private-sector participation in a B-loan syndication put together by the International Finance Corporation and the EBRD in respect of a €200 million tranche of a €700 million debt package. The success of this component reflects a range of factors, including the strength of the local legal environment and the quality of the underlying asset.

One further, relatively unheralded development has been the evolution of the VEB PPP Centre, which has a wide-ranging brief including pre-project sponsorship via a project promotion fund and the creation of regional PPP centres to support market and project development.

The project structures used in Russia are broadly similar to those developed in other parts of the world but they operate in a different legal environment and their implementation faces specific challenges.

One variant is to have a services or management contract supported by a leasehold interest in land. This suffers from a number of deficiencies when viewed from the perspective of project funders. Likewise, the concession-based model, for which there is a supporting legal framework in Russia, is not easily implementable owing to a number of drawbacks. These include:

  • a requirement to adopt a standard form document, which is not in accordance with best practice;
  • a requirement that the assets subject to the concession agreement always be in the ownership of a public authority;
  • restrictions on the security package that can be offered to funders; and
  • dispute resolution being restricted to Russian courts.

Models such as BOOT and BOT, by which public infrastructure facilities are constructed, owned and operated by an investor for a certain period and then transferred to the state, are not commonly used in Russia. There is existing experience of implementing such projects in Russia (1). Nevertheless, the federal legislation foresees certain limitations on use of these forms of cooperation within the PPP framework.

When it is possible to structure deals that fall within a project finance framework, they require the usual range of documentation, including direct agreements, swaps, cash management arrangements, intercreditor documents, contractor interface management agreements, equity and debt security packages, appropriate land interest documents, construction and O&M agreements. All these will typically be governed by English law if at all possible but are able to address the complexities of the interface between English and Russian law, particularly in the area of enforcement.

The following types of construction contract are frequently used in relations between commercial entities:

  • a single contract for design and construction – use of such a structure is reasonable when the general contractor has the capacity to perform both construction and design works (has relevant certificates of admission);
  • construction at a turnkey fixed price including EPC; and
  • agreement on comprehensive construction management including EPCM.

DBB is primarily used in placement of state orders for public use (when the customer has pre-project documentation and specifications and then holds an auction and enters into a contract for construction works). DBB is used in relations between commercial entities as well.

Construction of major industrial projects, especially when financed by foreign banks and financial organisations, is generally covered by the template forms of contract developed by FIDIC. These, however, require thorough adaptation to local reporting, tax, bookkeeping, etc. The AIA and NEC3 forms are almost never used in Russia. Specific Russian standard forms are not currently available (such forms were elaborated during Soviet times but are not used today).

In line with many emerging markets, there are more risks associated with process integrity and political uncertainty in Russia than in more mature economies. These risks must be managed, cannot be eliminated but are not usually the subject of legal documentation.

Construction phase risks, including design development and implementation, are managed through a blend of practical steps – simple mature designs, to be delivered by an experienced team that can manage the supply chain risks with ease – and subcontract documentation that identifies and allocates the risks to relevant consortium members in the usual way, and suitable methods for funding the capped liability. Where necessary, the subcontract obligations will be supported by parent or similar guarantees.

Interest rate and currency risks will be hedged through suitable instruments, again taking the effects of the Russian legal framework into account. Operational phase risks will be managed through suitable O&M subcontracts and any necessary inter-service‑provider arrangements. Public sector counterparty risk can be difficult to manage and may require guarantees at a suitable level. Inflation risk will be dealt with via the payment mechanism. Local performance management can be monitored by a suitable technical adviser.

In construction contracts, the major risk is that of accidental loss of or accidental damage to a facility. As a rule, this risk is borne by the contractor until the facility is accepted by the customer, unless the facility is destroyed or damaged owing to poor quality materials (parts, structures) or equipment supplied by the customer or owing to execution of inappropriate instructions from the customer.

With regard to materials and equipment, the risk of accidental loss or accidental damage and the risk of being unable to use them in construction is borne by the party that provides them. These risks are usually covered by insurance.

When the contract with the contractor foresees a fixed (not adjustable) cost of services, the contractor bears the risk of additional costs arising in the course of construction, even when it is not possible to calculate such costs accurately at the conclusion of the contract.

i Limitation of liability and force majeure

Typically, Russian construction contracts provide the following options to limit liability:

  • reimbursement for actual damage (excluding lost profits) only – as a rule, this clause is used for construction of large industrial facilities;
  • compensation of direct losses only;
  • liability in the event of an existing fault only (under Russian law, as a general rule, liability is incurred irrespective of fault, unless the parties to relations involving commercial entities agree otherwise); and
  • agreeing on a fixed cap, including money (in most cases, the law does not prohibit inclusion of such a provision but it is not often used in practice).

Russian law differentiates between liability for non-fulfilment of responsibilities and the laying on of risk: force majeure releases the contractor from liability but the latter continues to bear the risk of accidental loss of or accidental damage to the facility.

Russian law outlines key circumstances constituting force majeure but does not list them specifically. Force majeure events are exigent and unavoidable. Russian law considers the following as force majeure: natural disasters, acts of war, blockades, embargoes, etc.

Separately, the law specifies circumstances that cannot be considered force majeure (e.g., breach of duty by counterparties).

ii Political risks

The Russian Constitution, which directly applies, prohibits expropriation of property otherwise than by court ruling or in the public interest subject to prior and adequate compensation. The 1999 Federal Law ‘On Foreign Investments in the Russian Federation’ guarantees foreign investments and returns on investments under no less favourable treatment than that applicable to domestic investments, except for restrictions established by law in the public interests, including the right of use and unrestricted transfer of investments and returns.

Russia is party to numerous bilateral investment promotion and protection agreements (‘BIPAs’), including with the United Kingdom, Germany, China, France and around 50 other states. BIPAs prevail over national law, and typically provide the following guarantees pertaining to foreign investments:

  • freely transferrable compensation for losses suffered by a foreign investor owing to armed conflicts, a state of national emergency or civil disturbances, made without delay either on conditions no less favourable than those accorded to national investors or, often, on a most-favoured treatment basis;
  • foreign investments are not to be nationalised, expropriated or subjected to such equivalent measures, unless for a purpose in the public interest and not discriminatory and against payment, without delay, of appropriate and effective compensation for the real value of the investment;
  • unrestricted transfer of investments and returns in convertible currency without unjustified delay; and
  • subrogation of rights and claims of an investor indemnified by its home government in respect of the investment made in Russia.

Russia is a recipient member of MIGA. MIGA insurance is much used, especially by European financial institutions. In 2010 to 2011, for example, MIGA has issued guarantees totalling €7.4 million, covering ABN AMRO’s and Linx Telecommunications BV’s loans to Linx’s Russian subsidiary, and guarantees of $76 million covering Tapon France SAS’s investments in the construction of a new aluminium drinks can production facility in Volokolamsk. MIGA supported the Russian banking sector during the financial crisis.

Project funders will require security for all of the assets associated with a project, security assignments of the benefit of guarantees enjoyed by the project vehicle, and controls via security documentation over the project vehicle and its shares.

Where there are project risks that have been monetised and are managed through reserve pools, there will be security with respect to those pools.

Many risks will be managed via insurance for the overall project, with supporting security and claims management processes in place.

Funder security may also include contractual arrangements allowing funders to intervene in the management of the project in order to allow them to manage risks before they mature into major problems.

In many projects, credit support by sponsors and others will take the form of performance guarantees, although standby letters of credit and other forms of contingent financial support may be required, depending on the nature of the project, its structure and the risks to be managed.

Direct agreements and step-in rights are an essential component of the security package required by funders. Russian law does not, however, regulate step-in rights structures in their pure form.

About a year ago, Russian concession legislation was introduced with regulations similar to the step-in rights form (2). According to the regulations, the rights of the concessionaire under the concession agreement may be used as a method for securing the concessionaire’s liabilities to the creditor. In this case, an agreement determining the procedure for the grantor to carry out a tender for replacing a party under the concession agreement is made between the grantor, the concessionaire and the creditor. One of the conditions of this tender is that the winner undertake the liabilities of the concessionaire to the creditor.

Various forms of construction phase performance bond are still seen. Project bonds are returning to the market as a whole but most easily as a refinancing tool following completion of the construction phase. In Russia’s thin market, they are not common.

Bank guarantees are the most commonly used form of security in construction contract relations between customer and contractor. These are guarantees of due performance of obligations under the contract, guarantees of refund of advance payment and – more rarely – guarantees of performance during the warranty period. Parent company guarantees are also commonly used.

With regard to insurance, such liability is typically imposed on the contractor but there are cases when the customer acts as the insured (for example, the construction is included in the general insurance of the customer, including international). The most common types of insurance are construction all-risks, insurance for accidental damage to the facility under construction and other property at the construction site, and the contractor’s liability insurance for injury (third-party liability).

Project lenders will have a range of options available for enforcing and protecting their rights before undertaking formal insolvency-type proceedings. If they have cash reserves or pools available to them for resolving a problem, they might have recourse to these funds for the purpose. Likewise, funders will have a range of contractual rights and means of protection allowing them, under specific circumstances, to exercise control over aspects of the project, for example, to replace subcontractors if necessary for continuation of the project.

Initiation of bankruptcy proceedings bars enforcement of a pledge securing the obligations of the debtor. The lender holding the pledge may, however, enforce it if the stages of internal management or financial restructuring are introduced. Otherwise, the pledged property is sold at the final, liquidation stage of the proceedings.

Creditors whose claims are based on damage to life and health and employees of the debtor have priority in satisfaction of their claims over all other creditors (they form the first and second line of creditors, respectively). All other creditors are included in the third line. Claims of creditors holding pledges are, however, satisfied independently through sale of the pledged facility. The lender holding a pledge receives 70 per cent of the sale price (80 per cent if the creditor is a bank), the remaining sum being allocated to creditors of the first and second line and as compensation for bankruptcy costs.

The Law on Insolvency (Bankruptcy) (3) regulates the bankruptcy of all legal entities, individual entrepreneurs and individuals. There is also the Law on Insolvency (Bankruptcy) of Credit Institutions (4), which regulates the specifics of the bankruptcy proceedings of credit institutions.

When construction is launched, the developer must have the land plot (typically, owned or leased), design documentation and state expert review thereof, and a construction permit. Typically, the construction process is supervised by a state construction control authority, which carries out inspections in accordance with an inspection programme specially developed for each site. Completion of construction and the possibility of operating the facility must be confirmed by an operation permit, issued to the developer by the state authority.

Design documentation is not, as a general rule, subject to special environmental examination but it must pass an EIA and must outline measures for protection of air, use of water facilities (including waste water used for industrial facilities), rational use of soil, a programme to monitor any change in the ecosystem during, for example, construction and operation of the facility, etc.

With regard to licensing of construction activity, it was completely abolished in Russia from 1 January 2010, and a self-regulation process has instead been introduced. The rationale of self-regulation is that construction work affecting safety can only be performed by entities holding certificates of admission, which are issued by selfregulatory organisations consisting of professional constructors, and not by state agencies (in contrast to licences).

Russian legislation on PPP is in the very initial stages of development and there is no single legislative act regulating PPPs or at least laying the foundations for these relations in the Russian Federation. Some forms of PPP are implemented according to specific rules (e.g., concession agreements and production-sharing agreements). In practice, the majority of Russian PPP projects are implemented in the form of concession agreements.

Regional PPP laws exist in many regions of Russia, providing for a variety of different forms of project (the most representative is the law of St Petersburg). Even so, the federal legislation may, nevertheless, include limitations preventing use of these forms, primarily related to:

  • provision of land or property to the private partner (the legislation provides an exhaustive list of grounds for doing so and related procedures);
  • problems in establishing the tariff (if the private partner is to carry out activities at state-controlled prices or tariffs);
  • problems with state long-term financial commitments and the specifics of the Russian budget legislation; and
  • lack of proper management procedures for selecting the private partner, including the procurement or tender process, and other circumstances, including overall impediments to forcing the government to fulfil its commitments.

Among the most significant recent PPP projects are construction of a large section of he high-speed motorway from Moscow to St Petersburg, construction of a new exit from the Moscow ring road to the M1 ‘Belarus’ Moscow–Minsk federal highway and reconstruction of Pulkovo Airport.

The main legal act regulating public bidding is Federal Law of 21 July 2005 ‘On placing orders for goods, works and services for state and municipal needs’.5 According to this law, ordering can be by auction in the form of competitive bidding, auction, including an auction in electronic form and without competitive bidding (request for quotations, with a single supplier (executor, contractor) on commodity exchanges). The procedure for each procurement method, as well as cases when the appropriate method can be applied, are regulated in detail.

The Russian system for placing orders is generally based on accepted principles for tender procedures: equal treatment, transparency and competition. The said law on placing orders specifically highlights its goals: ensuring a unified economic environment, efficient use of budgetary resources, fair competition, openness and transparency, preventing corruption, etc.

The Russian legislation envisages a special procedure for disputing a state order, which may be used within a limited period of time set by law. Accordingly, any bidder is entitled to dispute the action (inaction) of the customer, the authorised body, a specialised organisation, the operator of an electronic platform, tender, auction or bidding committee, by means of a specific procedure, if such actions (inaction) violated its rights and legitimate interests.

Complaints are reviewed by the relevant authorised federal executive body: the Federal Antimonopoly Service (for federal procurement, as well as regional and local orders), the executive state authority of the Russian regions (in relation to regional and municipal contracts) and the local authority (in respect of municipal contracts).

These bodies may but are not required to suspend the placing of an order pending appeal by issuing a relevant request to customers and other authorised bodies and organisations. The legislation also prohibits the customer from signing a contract until the complaint has been reviewed.


Licensing of construction activity in Russia was completely abolished in 2010, so no licensing of foreign contractors is required either. The general requirements of the Russian legislation on membership of a self-regulating organisation and existing admission to implementation of the relevant work apply to foreign companies (see supra).

No restrictions on the involvement of foreign contractors exist with regard to routine construction, but certain restrictions may be associated with specific areas of activity. For example, as a general rule, foreign contractors are not allowed to participate in the construction of public facilities for the defence or security of the Russian Federation.

Compliance with the regulations regarding foreign workers also plays a significant role. Foreigners may only work if they have work permits (with minor exceptions), which are generally issued for one year.

A foreign company can carry out business in Russia through a branch or representative office, or establish a Russian subsidiary. Branch or representative office structures are generally used for the initial period of market research and auxiliary activities. A branch may perform all the business operations carried out by the foreign company, while a representative office may only carry out liaison and ancillary functions.

Consequently, most representative offices are not subject to profit tax, unless their activities give rise to a permanent establishment for tax purposes. At a later stage, it may be advisable for the business to be run through a Russian company.

Branches and representative offices are subject to accreditation with the authorized agencies and registration with Russian tax authorities, state statistics agencies and, if they meet established criteria, state social security funds. In some cases, foreign companies operate in Russia by registering with the local tax authorities only, provided that the company’s business does not meet the qualifying criteria for a branch.

A Russian company starts its corporate existence from the date of its state registration and entry in the Companies’ Register. Simultaneously, a company is automatically registered with the tax authorities, state statistics agencies and state social security funds. The time for this, established by law and adhered to for state registration of a company, is five business days. In practice, though, it takes longer to establish a company, owing to the considerable volume of preparatory work required.

Acquisition of company shares or assets may be subject to antimonopoly control in the form of either notification of or prior approval by the Federal Antimonopoly Service, if certain thresholds are met. It should be noted that Russian competition rules (including the rules for clearance of M&A transactions and asset transfer) are applicable extraterritorially. Thus, any offshore M&A transaction that has even a minimal Russian element may need clearance in Russia.

Foreign investments in strategic sectors are also subject to special regulation. The strategic sectors are listed in the 2008 Federal Law on Foreign Investments in Companies of Strategic Importance for State Security and Defence and include:

  • geological survey, exploration and development of subsoil areas of federal significance;
  • aviation and space;
  • television and large-scale radio broadcasting and printed media;
  • telecoms (except for internet providers);
  • entities listed as natural monopolies; and
  • entities listed as having a dominant position on the market.

Acquisition of control by a foreign investor over Russian companies operating in the strategic sectors is subject to prior government approval and may be subject to acceptance of and compliance by the foreign investor with certain additional obligations imposed by the government in regard to the operations of the strategic company (e.g., maintenance of the established tariffs, maintenance of average staff numbers, etc.).

The law prohibits a foreign state, international organisation or organisation under its control from acquiring control of a strategic company. Acquisition of a blocking right in a strategic company is subject to prior government approval.

In order to create a climate favourable to investment, a number of incentives of a customs, tax, legal, financial and other nature have been established. Some benefits are not available in practice at the federal level (e.g., non-applicability of untoward change of law during the pay-back period) since they are subject to the investment project being included in a special government register that has not yet been approved. Benefits may be available to investors at the regional or municipal level, subject to them meeting the established conditions and a government or municipal resolution. Special benefits may apply to PPP projects (Section IX, supra), in particular, investments in special economic zones of a production, innovative, recreational or port type, including free customs treatment (import or export customs duty relief), land and infrastructure at lower prices, etc.

The Russian currency control law allows operating funds or profits to be exchanged from one currency to another, but only with the involvement of a Russian bank. In practice, it is possible to exchange one currency into another at the internal exchange rate of the Russian banks (this is more expensive but faster, taking only a few minutes) or to instruct the Russian bank to sell one currency for another on the Interbank Currency Exchange (this may be less expensive but more time-consuming). The decision of the owner of the currency and its instructions to the bank constitute the legal grounds for the exchange of one currency into another.

Legally, there are no restrictions on removing profits and investments from Russia, but again certain procedures must be followed: legal formal grounds are required for removing the profit or investments.

Russian companies selling anything to foreign companies must repatriate the foreign earnings unless the currency control law of Russia allows such companies to keep the foreign earnings abroad or offset them against their liabilities.

Failure by a Russian company to repatriate foreign earnings or repatriate them by the time established in the sale or other agreement or contract might entail an administrative penalty on the Russian company of between 75 per cent and 100 per cent of the earnings not repatriated on time. This is, in fact, a strict liability case: the Russian company may not blame for the failure of the foreign buyer to pay in time, yet it will be held liable unless it manages to prove in court that it has done everything possible to repatriate the earnings in time. The only defence is to prove in a court action that the company has done everything possible or that the company had the right to keep the earnings outside Russia.

Consideration of economic disputes and other cases relating to entrepreneurial and other economic activities falls within the jurisdiction of state arbitration (commercial) courts. These courts consider disputes involving individual entrepreneurs, Russian and foreign organisations, including ones with foreign investments. The Russian Arbitration Procedure Code does not provide for any exceptions concerning disputes relating to project finance transactions or construction contracts. For this reason, if the parties fail to resolve their dispute out of court, the dispute is brought before a national state arbitration (commercial) court.

When a dispute is resolved through the courts, the following procedural specifics of consideration of cases by the commercial courts must be taken into account. First, disputes related to insolvency of debtors, corporate and other disputes are necessarily considered by the Russian commercial courts. Second, disputes over rights to real estate must be considered by the commercial court at the location of the real estate. Similarly, disputes involving a debtor’s bankruptcy petition fall within the exclusive jurisdiction of the state arbitration court where the debtor is located.

It is important that legal regulation of said issues may not be changed by agreement between the parties or in any other way.

Following the closings late last year and the momentum in the St Petersburg region, there is reason to believe that the market will continue to mature with opportunities in sectors such as transport and water. Until there is an improvement in the legal and institutional framework for these projects, however, progress will be slow and international banks will continue to play a peripheral role.

In terms of the global competition for scarce capital in the current economic climate, other countries in the region, such as Kazakhstan, appear set to progress more quickly than Russia.


(1) Such as projects for expanding treatment facilities in Zelenograd, a few projects in the field of mechanical dewatering of sewage sludge (implementation of which started as early as back in 1997/98), construction of the sodium hypochlorite production facility in Moscow and construction of the South-West Wastewater treatment Facility in St Petersburg, etc.

(2) The amendments were effective from 6 July 2010.

(3) FZ-127, 26 October 2002.

(4) FZ-40, 25 February 1999.

(5) No. 94-FZ.

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