New legislation will allow Russian holdings to protect their overseas assets in Russian courts in the event of bankruptcy, the Economic Development Ministry said.

Russia currently lacks legislation that details the procedures for cross-border bankruptcies, potentially spelling trouble for Russian firms that are controlled by companies registered abroad.

A foreign creditor could start bankruptcy proceedings in the country where the company is registered, and the claim would be accepted in most cases because of the lack of relevant Russian legislation, said Dmitry Sepanov, a lawyer at Yegorov, Puginsky, Afanasyev and Partners.

But Economic Development Minister Elvira Nabiullina told President Dmitry Medvedev this week that a raft of amendments to the bankruptcy law would also prescribe procedures for international bankruptcies and group bankruptcies. A special section dedicated to cross-border bankruptcy procedures will be added to the amendments, said Ivan Oskolkov, director of the corporate governance department of the Economic Development Ministry.

The bankruptcy of a company that holds assets or liabilities acquired abroad would be considered in a Russian court and vice versa, Oskolkov said. This is done so that Russian courts can provide international protection from creditors during bankruptcy proceedings.

Before foreign judges can recognize bankruptcy protections given by Russian courts, it is necessary for Russian judges to carry out the decisions of foreign courts, Oskolkov said.

International law abides by the Center of Main Interests framework, in which the jurisdiction is determined by the location of the company's main assets, Sepanov said. In this case, a bankruptcy started by a Cypriot company whose center of main interest is in Russia could transfer the request to a Russian court. In extreme cases, there could be two parallel processes, but the Cypriot court would defer to the decision of the Russian court.

Automatic recognition of a decision is possible except in the Commonwealth of Independent States, which have signed a special convention, lawyer Alexei Melnikov said. In the European Union, the decisions of Russian courts require additional confirmation by local courts, especially considering the reputation of Russian jurisprudence, he said.

Many of the biggest Russian firms are controlled by companies registered abroad. Alexei Mordashov controls Severstal through the Cyprus-registered Frontdeal; Viktor Rashnikov holds 87 percent of Magnitogorsk Iron & Steel Works through two companies from Cyprus — Mintha Holding and Fulnek Enterprises; Vladimir Lisin controls 77 percent of Novolipetsk Steel through Fletcher Holding; and Viktor Vekselberg's main holding, Renova, is registered in the Bahamas.