Provision of Guarantees of the Subjects of Russian Federation

      Russian law envisages the possibility for the subjects of the Russian Federation to provide the so-called "governmental guarantees of the subjects of the Russian Federation". The procedure and terms and conditions of governmental guarantee provision are defined in the Budget Code of RF (hereinafter -"the BC RF").

      In compliance with Article 115 of the BC RF the governmental guarantee is the means of securing civil obligations by virtue whereof the subject of the Federation - the guarantor provides a written obligation to be liable in full or in part for the discharge of obligation toward the third parties by the person receiving the governmental guarantee.

      The governmental guarantees of the subjects of the Federation are granted to the subjects of the Russian Federation, municipalities, and legal entities (Article 117 of the BC RF).

      The right to provide internal loans and governmental guarantees on behalf of the subject of the Russian Federation to other borrowers for attraction of credits (loans) belongs to a sole authorized body of the executive authorities of the subject of the Russian Federation (para 3, Article 104 of the BC RF). This entails the following. First, it is impossible to grant a guarantee for the purposes other that attraction of credits (loans). Second, it is necessary to determine the body of the executive authorities of the subject of the Russian Federation vested with the authority to grant governmental guarantees.

      The governmental guarantee should specify the following:
-   information on the guarantor, including its name (the Russian Federation, the subject of the Russian Federation, the municipality) and the name of the body which has provided the said guarantee on behalf of the above guarantor;
-   the scope of obligations under the guarantee.

      The term of the guarantee depends on the term of the discharge of obligations to secure which the guarantee has been given. As a rule, the guarantees are provided on a competitive basis.

      The subject of the Federation bears secondary liability as the guarantor in addition to the debtor's liability under the secured obligation. The guarantor's obligation toward a third party specified by the governmental guarantee is restricted to the payment of the sum corresponding to the scope of obligations under the guarantee.

      Only the guarantees of the obligations constituting the governmental external debt of the Russian Federation may provide for the joint and several liability of the guarantor.

      It should be also noted that in compliance with Article 107 of the BC RF the law of the subject of the Federation on the budget for the next fiscal year should set forth the upper limit of the debt of the subject of the Federation specifying the maximum scope of obligations under the governmental guarantees. The maximum amount of the governmental debt of the subject of the Federation should not exceed the volume of income of the respective budget with no account for financial assistance from budgets of other levels of the budgetary system of the Russian Federation.

      At the same time, in accordance with para 2, Article 117 of the BC RF the law (resolution) on the budget of the subject of the Federation for the next fiscal year should set forth a concrete list of guarantees to be provided to individual subjects of the Russian Federation, municipalities and legal entities for the amount exceeding 0.01% of the expenses of the respective budget.

      The total amount of the guarantees provided is included in the debt of the subject of the Russian Federation as a kind of bond.

      A respective financial agency of the subject of the Federation keeps record of the guarantees issued, discharge of the guarantee-secured obligations by the guarantee recipients, and payments under the guarantees.

      Whenever the guarantee recipient discharges his obligations toward the third party, the debt of the subject of the Federation is reduced by a corresponding amount, which is reflected in the report on budget execution.

      As regards the form of the governmental guarantee, the following is envisaged. In compliance with para 1, Article 115 of the BC RF, a written form of the governmental guarantee is mandatory. The failure to comply with such requirement entails invalidity of the guarantee. At the same time, Article 99 of the BC RF makes it possible to conclude that an agreement on provision of the governmental guarantee as a written document is a governmental guarantee.

      Para 3, Article 99 of the BC RF defines the forms of bonds of the subjects of the Federation, i.e.:

-   credit agreements;
-   governmental loans of the subjects of the Russian Federation through issue of securities by the subject concerned;
-   agreements on receipt by the subject of the Russian Federation of budget loans and credits from budgets of other levels of the Russian budgetary system;
-   agreements on provision of governmental guarantees of the subject of the Russian Federation;
-   agreements and international treaties concluded on behalf of the subject of the Russian Federation on prolongation and restructuring of the past bonds of the subjects of the Russian Federation.

      Hence, though the law does not provide for the issue of the governmental guarantee as a separate document, it requires conclusion of an agreement on provision of a governmental guarantee.

      The conclusion that the governmental guarantees are provided in the form of an agreement on provision of governmental guarantees is attested by the practices of law enforcement agencies in issuing governmental guarantees.

      In compliance with the Procedure for provision of governmental guarantees on a competitive basis at the expense of budget funds allocated for the development of the Russian Federation approved by the Resolution of the Government of the Russian Federation of 22 November 1997, No. 1470, the governmental guarantees provided at the expense of the budget of the Russian Federation are the collateral of the Russian Government; they are provided to Russian investors on a competitive basis to secure the loans for implementation of investment projects.

      Based on the decision to provide a guarantee, the Ministry of Economy of RF signs with the creditor and the borrower a contract of surety for provision of the governmental guarantees for implementation of investment projects. The amount of governmental guarantees in this case makes up to 40% of funds actually provided by creditors for implementation of the investment project concerned.

      Governmental guarantees for leasing operations are provided in the same manner (Resolution of the Government of RF dated 3 September 1998, No. 1020 On Approval of the Procedure for Provision of Governmental Guarantees for Leasing Operations).

      In compliance with the procedure of provision of governmental guarantees for investment projects of social and economic value established by Resolution of the Government of RF dated 12 November 1999, No. 1249, pursuant to the results of the tender the government of RF takes a decision to provide governmental guarantees for every investment project. After that the borrower who receives a governmental guarantee signs with the creditor a credit agreement on provision of funds for implementation of the investment project concerned. In its turn, the Ministry of Finance of RF signs with the creditor a contract of surety for provision of the governmental guarantee.

      Hence, usually the governmental guarantee is provided in the form of a contract of surety signed with the creditor for provision of the governmental guarantee. Respectively, the Russian Federation as a guarantor undertakes a secondary liability towards the creditor within the limits of the guarantee amount in the event of the failure to discharge or improper discharge by the debtor of the principal obligation. Only in those cases when the circle of persons for whom the governmental guarantee is provided is not identified, and the time of the governmental guarantee provision cannot be determined, the governmental guarantee provision agreement is signed with the debtor. However, even in this case concrete obligations are specified which, if not performed, entail the guarantor's liability towards the third parties.

      For instance, the Government of RF entered on September 11, 1995 into a General Agreement No. 5-3-08 with the Russian Joint-Stock Company "Vysokoskorostnye Magistrali" on provision of guarantees under the bonded debt of RJSC "Vysokoskorostnye Magistrali". At the time the Agreement was signed, the bond owners were not and could not be known, since the guarantee was provided prior to floating of bonds. However, the obligation covered by the guarantee was specified - the obligation to redeem the bonds of RJSC "Vysokoskorostnye Magistrali" and pay the coupon income on these.

      Similarly, whenever the Agency for Housing Mortgage Crediting attracts loans by floatation of bonds secured by guarantees, the guarantee secures the discharge of obligations by the Agency resulting from floatation of bonds issued by the Agency.

      In accordance with the Rules of provision of governmental guarantees to JSC "Agency for Housing Mortgage Crediting" approved by the Government Decree dated August 25, 2001, No. 628, whenever the Government of RF takes a decision to provide the governmental guarantee, the Ministry of Finance of RF signs with the Agency a respective agreement which should specify material terms and conditions of the guarantee provision, the rights and obligations of the Ministry of Finance of RF and of the Agency, the procedure for making claims for exoneration by the Ministry of Finance of RF related to the discharge of obligations under the guarantee and redress of the same by the Agency.

      In accordance with the material terms and conditions of guarantee provision, the guarantees secure the Agency's obligations toward the bond holders to pay the par value of the coupon bonds. The guarantees come into effect as of the moment the right of property to the Agency bonds, the discharge of obligations under which is guaranteed by the Russian Federation, is transferred to their holders. The term of the guarantee depends upon the term of redemption of the bonds the discharge of obligations under which it secures. At the same time, the bond holders have the right to demand that the obligations under the guarantee are discharged within 90 days following the Agency's failure to fulfill its obligations to pay the par value of the bonds. Unless such a demand is made within the period specified, the effect of the guarantee is terminated.

      The obligations of the Russian Federation under the guarantees arise only in the event the Agency (or its assignees) fails to discharge the obligations toward the holders of the bonds stipulated by the terms and conditions of issuance of the bonds to pay their par value (guaranteed case). The defaulted discharge or failure to discharge by the Agency of other obligations toward the bond holders does not constitute a guaranteed case.

      Another case when the governmental guarantee was provided to an unidentified circle of persons and the agreement of governmental guarantee provision was signed with the debtor, the Russian Federation represented by the Ministry of Finance of RF, pursuant to the Resolution of the Russian Government dated 26 October 2001, No. 738, granted a governmental guarantee to JSC Moscow Insurance Company for insuring civil liability of Russian air carriers toward third parties in the period of up to 31 December 2001 in the amount of 30 billion Rubles. Respectively, the obligation covered by the guarantee was the air carriers' obligation to compensate damage to the third parties.

      Hence, in compliance with current Russian laws a governmental guarantee is recognized as a means of securing an obligation and is the obligation related to the principal obligation which should be specified when the guarantee is granted. The request to specify the obligation secured by a guarantee in the agreement of the governmental guarantee provision is directly stipulated in para 1, Art. 117 of the BC RF.
      In the event when the subject of the Federation assumes debt liability in the form of governmental loans of the subject of the Federation executed through issuance of the subject's securities, the forms and types of governmental securities issued on behalf of the Russian Federation, as well as the terms and conditions of their issuance and circulation are determined by respective governmental agencies of the subjects of the Russian Federation in compliance with the BC RF and the Federal Law On Peculiarities of Issue and Circulation of Governmental and Municipal Securities.

      Subject to Art. 3 of the above Federal Law the governmental and municipal securities may be issued as bonds or other types of securities attributed to emissive securities pursuant to the Federal Law On the Securities Market verifying their holders' rights to receive from the issuer moneys or, depending on the terms and conditions of their issuance, property, established percentage of their par value, or other property rights within the periods specified in the terms and conditions of the securities issue. Simultaneously the above Federal Law establishes the requirements to the issue of emissive securities on the external markets. However, the Federal Law On the Securities Market does not stipulate such kind of emissive securities as guarantees.

      Current laws do not stipulate issue of bills of exchange of the subject of the Federation for credit attraction, either. Art. 2 of the Federal Law On the Bills of Exchange And Promissory Notes sets forth that "the Russian Federation, subjects of the Russian Federation, cities, towns, villages and other municipalities have the right to become obligated under a bill of exchange and promissory note only in the cases expressly stipulated by a federal law".

      As regards the right of the subject of the Federation to assume obligations in foreign currency toward a non-resident, the following should be noted.

      In compliance with Art. 90 of the BC RF governmental loans of the subjects of the Russian Federation - loans and credits expressed in the currency of obligations, granted by natural persons and legal entities, giving rise to debt liabilities of the subject of the Russian Federation as a borrower or guarantor of loan (debt) repayment by other borrowers. At the same time, in accordance with Art. 8 of the BC RF the issue of governmental and external loans of the subjects of the Federation and control over the governmental debt of the said subjects is within the competence of the subjects of the Federation.

      Based on the above, a conclusion can be made that the subject of the Federation is entitled to assume debt liability towards non-residents as a guarantor of loan (credit) repayment in foreign currency, provided this does not run contrary to normative acts of the subject of the Federation in the sphere of budget relations regulation.

      At the same time, a guarantee can be granted prior to actual commencement of crediting, since in compliance with Art. 361 of the Civil Code of RF a contract of surety may be concluded to secure an obligation which will arise in the future.

      Subject to Art. 121 of the BC RF the information about debt liabilities of the subject of the Federation should be entered by an authorized body of the executive authorities of the subject concerned in the state debt register of the subject of the Russian Federation maximum within three days after a respective obligation has arisen.