Potential foreign investors often ask whether it will be possible to obtain a Russian government guarantee to secure the financing of a project. In this context a guarantee is a promise to pay if the borrower who is primarily liable to pay fails to do so.


A government guarantee will not usually be available unless the project is of such importance to Russia -- if it would increase oil production, for example -- that the government is prepared to do everything it can to attract the investment.


Sometimes other guarantors are proposed and therefore it is worth considering what a guarantee should include. An investor will usually accept a guarantee only if he can sue the guarantor if he, in turn, fails to meet his obligation. Therefore the guarantee should state not only exactly what obligation it covers but also what law applies to it -- it does not have to be Russian law -- and where proceedings can be taken if the guarantor does not pay up.


Anyone accepting a guarantee should be aware that, as a rule, the Russian Civil Code provides that a guarantee will expire three months after the date on which the obligation to pay arose. Therefore if the borrower fails to repay a debt due on March 1, the lender must issue proceedings against the guarantor by June 1. The lender should be careful that his time for taking proceedings does not run out while he is negotiating alternative terms of payment, because under Russian law time limits cannot be extended by agreement between the parties.


On the rare occasions when the government is prepared to guarantee a loan, a special procedure must be followed. The offer of a guarantee may be made by the Ministry of Energy, but the proposal must be considered by the Department of Foreign Credits of the Ministry of Finance. If the guarantee is approved in principle, the department will draft it and the draft will be approved by the minister or his deputy. It will then be signed by a member of the government. The guarantee must then be registered in the State Book of External Indebtedness of the Russian Federation and only becomes valid when it receives its registration number.


As it is assumed that government guarantees will be honored, it is unusual for them to provide for any form of dispute resolution. Such guarantees could be regarded as political rather than legal documents. Should such a guarantee be disputed, however, there appear in theory to be two possible courses of action: to rely on an investment protection treaty, if there is one which applies to the circumstances, or on the Law on Foreign Investment which refers disputes concerning investment in very general terms to the Supreme Court.





Marcia Levy, an attorney at Norton Rose, has been practicing law in Moscow for two years.