Through Sanctions: What Challenges Russian Eurobond Holders Are Facing

The authors: Aram Grigoryan, Aleksandra Ignatyeva

This article was originally published in the online edition of the Russian-language Forbes. Since the issues discussed in it remain relevant for a wide range of foreign investors, we have prepared this English translation.

The original Russian-language version of the article is available on the Forbes website.

Very soon, the securities market will cross the four-year mark of sanctions and counter-sanctions restrictions. The blocking of foreign securities in the European depositories Euroclear and Clearstream has become the most visible part of the problem — but by no means the only one.

A less publicized, yet equally complex aspect affects holders of Russian eurobonds abroad: thousands of high-net-worth investors have become trapped between foreign market infrastructure, through which payments cannot be processed, and Russian issuers, who are not always willing or prepared to honor their obligations under the bond issues.

At the same time, around 150 distressed eurobond issues continue to circulate on the market. Although this is far less than the volumes seen several years ago, the outstanding debt to investors remains significant.

Nevertheless, investors are not giving up — and are finding new ways to gain access to their money. In this article, we examine some of those approaches.

How the Eurobond Issuance Structure Works

For many decades, eurobonds were a standard instrument for raising capital among the largest Russian borrowers — from Sberbank to Lukoil.

As a rule, the structure worked as follows: a Russian company would establish a technical legal entity abroad — an SPV (special purpose vehicle), whose primary purpose was the issuance of securities and related activities. After the eurobond issue was placed, the SPV transferred the funds received from investors to the parent company under a loan agreement, while the Russian company itself acted as a guarantor of the obligations. In some cases, the issuance documentation did not contain a guarantee provision, but this did not change the economic essence of the transaction: the funds were received by the Russian borrower — hereinafter referred to as the “debtor.”

Payments under such eurobonds (principal redemption and coupon payments) were made through the standard international chain: the Russian borrower transferred funds to the SPV, the SPV transferred them to the paying agent (often Citibank N.A. or The Bank of New York Mellon), after which the funds were credited to the international depository and then cascaded down the chain to the ultimate bondholder.

This structure functioned without disruption — until sanctions and counter-sanctions brought it to a halt.

How the Rules of the Game Have Changed

Since the spring of 2022, international settlements on eurobonds have effectively come to a halt: the first payments made in March–April 2022 were blocked at the level of foreign paying agents and Euroclear/Clearstream. The funds remain on the accounts of foreign institutions to this day.

In response, on 5 July 2022 Presidential Decree No. 430 was adopted, restricting the possibility of directing eurobond payments into foreign market infrastructure. From that moment on, payments abroad could only be made subject to a special authorization of the Government Commission.

Such authorizations were granted to a limited number of issuers that were not under sanctions at that time — for example, Gazprom and Lukoil. The remaining issuers were required either to issue replacement bonds denominated in rubles, or to organize payments to bondholders directly, bypassing the foreign payment system. At the same time, the new rules applied only to those investors whose eurobonds were held in Russian depositories.

In August 2022, Presidential Decree No. 529 was issued in support of eurobond payments, allowing Russian debtors to make coupon and redemption payments to investors whose securities were held in foreign depositories. The decree provided that payments could be made to residents into ordinary Russian bank accounts, and to non-residents into special “Type D” accounts.

However, even this mechanism may be used only where a special authorization has been granted by the Government Commission or the Bank of Russia. In other words, if a debtor wishes to make coupon or redemption payments to investors whose bonds are held abroad, it must itself take proactive steps to obtain such authorization and then implement it by making the payment to bondholders. It is clear that not all issuers have chosen to follow this route, as obtaining such authorization is a right — but not an obligation.

How Payments Are Regulated Within the Russian Infrastructure

If eurobonds have not been replaced and are held in a Russian depository, the payment regime depends primarily on the date of acquisition. However, the uncertainty surrounding the application of presidential decrees, as well as the absence of liability for Russian debtors for failure to pay coupons and redemptions, has periodically led to disputes between investors and bond issuers.

One of the most notable examples of widespread investor dissatisfaction was the collective claim against GTLK. In 2023, after a prolonged period of non-performance under the bonds, a group of bondholders initiated proceedings against the company. GTLK subsequently began to repay its obligations, and the proceedings were ultimately discontinued.

Overall, based on the analysis of court practice, problems within the Russian market infrastructure tend to be episodic rather than systemic — which cannot be said about bonds that remain frozen within foreign market infrastructure.

If the Bonds Are Held Abroad

As noted above, missed payments on eurobonds may be recovered only under Presidential Decree No. 529 — and only where the debtor itself has obtained a special authorization from the Government Commission or the Bank of Russia. Without such authorization, the debtor has no legal grounds to transfer a missed coupon or redemption payment to an investor.

However, recent court practice in Russia shows that investors have gained a new way to obtain the coupon and redemption payments due to them from debtors.

Even where the debtor has not obtained authorization for payment, courts are ruling in favor of investors and ordering repayment of the debt on the basis of general provisions of Russian civil law.

In a number of recent disputes, Russian courts have upheld claims brought by investors whose securities were held abroad. The courts correctly indicated that sanctions and the suspension of international settlements did not terminate obligations under eurobonds.

For example, in the case brought by investor Alexander Gorbatovsky against MKB (Credit Bank of Moscow), the court awarded coupon payments from MKB on the basis of general rules of Russian loan law, having established that it was MKB that was the actual debtor under the eurobonds issued by CBOM Finance plc.

The facts of the case reflected a classic scenario: in 2020 the investor acquired 2,000 eurobonds of the CBOM-24 issue. The bonds had been issued by the Irish SPV CBOM Finance plc, created for the purpose of financing a loan to Credit Bank of Moscow. The investor’s securities were held with Credit Suisse, and payments were made regularly until 2022.

Following the introduction of sanctions, coupon payments — and subsequently redemption — did not reach the investor. He applied to a Russian court and succeeded in recovering the principal and accrued coupons, despite the fact that both MKB and the Bank of Russia argued that the Presidential Decree did not allow the bank to make payments to investors without a special authorization.

In the case brought by investor Mikhail Tarasov against GTLK, the court likewise found that foreign sanctions did not prevent the Russian debtor — GTLK — from performing its obligations. In this case, the investor had purchased 800 eurobonds of GTLK Europe DAC back in 2018–2019 through foreign broker UBS, well before sanctions were introduced. Payments were made until 2022, but by the redemption date in May 2024 the investor had not received either the principal or the coupons.

Meanwhile, the Irish subsidiary — the bond issuer — had entered liquidation. The investor turned to the Russian guarantor, JSC GTLK, but the company failed to make payment despite its public statements of readiness to perform. The court ultimately ruled in favor of the investor, recovering the outstanding coupons and redemption amount from the guarantor.

In the case brought by investor Sergey Polyakov against the same GTLK, the circumstances were similar: the investor had acquired the bonds prior to the introduction of sanctions through broker Sova Capital. In 2022 payments on the bonds ceased, and all attempts to transfer them into the Russian market infrastructure proved unsuccessful.

The court again ruled in favor of the investor, finding that the debtor, by evading performance of its eurobond-related obligations, caused harm to the claimant.

It is important to note, however, that the practice did not immediately develop in favor of investors. For example, the outcome was different in the Kalachnikovs v. Russian Railways (RZD) case.

At the end of 2019, the investor spouses acquired eurobonds of RZD Capital PLC maturing in 2022 through Swiss bank UBS. Unlike most eurobond disputes, where claimants pursue the Russian debtor, in this case the investors brought a claim directly against the SPV-issuer and simultaneously sought to involve Russian Railways as a jointly liable debtor.

The court rejected the claims against Russian Railways, finding that it was not a guarantor under the issue and did not bear joint liability for the debt of its SPV.

What Happens If the Money Never Reaches the Investor

In practice, Russian court cases relating to eurobond disputes are highly diverse and continue to be supplemented by unusual — and in some instances paradoxical — precedents. One such case was NS Bank v. SUEK. The claimant sought a repeated payment of a coupon for March 2022, which the debtor had duly transferred in accordance with the issuance documentation, but which became stuck in the account of the paying agent — Citibank N.A. Despite the fact that the funds had formally already been sent, the court unexpectedly sided with NS Bank and ordered the debtor to pay the amount a second time. The decision was upheld by the appellate court, the cassation court, and even the Supreme Court. We regard this case as exceptional and would not recommend relying on it when developing a litigation strategy.

Another unusual precedent was a dispute brought by a foreign company against Rosselkhozbank (RSHB), heard by the Moscow Arbitrazh (Commercial) Court. The dispute concerned the fact that the bank credited coupon and redemption proceeds to a Type “C” account, whereas the claimant insisted that the funds should have been credited to an ordinary bank account. Once again, the court ruled in favor of the investor, finding that the company was controlled by a Russian national and that, accordingly, the rules on Type “C” accounts did not apply to it. RSHB was ordered to make the payment again — this time to a standard bank account. At the same time, the fate of the funds already held in the Type “C” account belonging to the same foreign company was not resolved.

In our view, these cases clearly illustrate the current state of dispute resolution in the eurobond market: there is virtually no limit to the creativity of affected investors, while courts are forced to interpret rapidly evolving legislation on the fly — and not always successfully.

Conclusions from Court Practice

If a Russian debtor has not made use of Presidential Decree No. 529 and has failed to ensure payment of amounts due to investors, the latter are entitled to bring a claim against such debtor before a Russian court. In light of current court practice, the prospects of success in such cases appear to be high. In addition, the cases reviewed allow the following broader conclusions to be drawn:

First, courts proceed from the position that the real debtor under eurobonds is the party that received the financing under the loan or provided the guarantee.

Second, even where a formal default has occurred under the bond issue and the mechanisms provided for in the issuance documentation are technically triggered, in practice they are neutralized by the effect of counter-sanctions measures. This enables the investor to bring a non-contractual (tort) claim for damages and thereby avoid both the arbitration clause and the governing law of the bonds — typically English law. From a strictly doctrinal legal perspective this construct is not ideal, but it nevertheless provides the investor with access to effective judicial protection.

Third, Russian courts consistently apply Russian law and disregard the provisions of the issuance documentation where they conflict with imperative counter-sanctions regulations.

Against this background, it is critically important to present to the court all relevant factual circumstances — even those that may seem obvious to a sophisticated investor but are by no means obvious to the court.