Oda Russian Commercial Law 2007-1

352 TORT (OBLIGATIONS ARISING FROM CAUSING OF HARM) AND UNJUST ENRICHMENT

ordered in the criminal procedure to pay 100,000 roubles in moral damages to P. P had claimed compensation of 385,000 roubles for material damage and 42,640,012 roubles for moral damage.

Upon protest, the Supreme Court ruled that the lower court had failed to take into account the physical suffering of the victim and other circumstances referred to by the victim. Also the lower court had failed to apply Article 1069 which provides that in cases there the fault of a judge was established by a judgment which entered into force, the victim will be compensated from the Federal budget.25

The Law on the Protection of Environment of 2001 also provides for compensation for environmental damage:

The State Far-Eastern Marine Environmental Protection Agency brought an action against the Paci c Naval Fleet for compensation of 37,531,482,500 roubles (before denomination) for polluting the environment by arbitrarily dumping waste in the sea. The rst instance court acknowledged the claim for compensation of up to 12,749,482,500 roubles. The court of the appellate instance upheld this. The Supreme Commercial Court, however, reversed the judgment on the ground that compensation of damage in such cases should be calculated on the basis of the actual cost of restoring the polluted state of environment.26

7UNJUST ENRICHMENT

Aperson who, without a ground established by law, or other legal acts or juristic acts, has obtained or kept property at the expense of another person must return this property to the latter (Art.1102, also see exceptions in Art.1109). The same applies to a person who assigned his right to another person on the ground of a non-existing or invalid obligation (Art.1106).

As a rule, property which represents unjust enrichment has to be returned in kind (Art.1104). If this is impossible, the actual value of the property at the time of the acquisition shall be returned, together with the damage resulting from the subsequent change of its value if the person has failed to return the property without delay when he became aware of the fact of unjust enrichment (Art.1105, para.1). Furthermore, all income which this person has received or would have received from the property, if this person was aware, or should have been aware of the fact of unjust enrichment should be returned with the property (Art.1107, para.1):

25Decision of the Presidium of the Supreme Court, May 7, 2003, Case No.27pv03.

26Decision of the Presidium of the Supreme Commercial Court, February 18, 2000, Dolzjenko, supra, pp.915-916.

11

BANKING LAW

1HISTORICAL BACKGROUND

The origin of the modern banking system in Russia goes back to the nancial reform of 1859. The State Bank of Russia was founded in 1860, followed by some private credit institutions. At the beginning of the 20th century, the Russian banking system comprised the State Bank, the State Savings Bank and some other government banks plus various social and private credit institutions including around 50 commercial banks which were formed as joint stock companies and in addition, 300 city credit societies and banks.1

Immediately after the October Revolution, these banking institutions were nationalised by the Decree on Nationalisation of Banks. Banking business was declared to be under state monopoly. Activities of foreign banks in Russia were prohibited by 1918.

At the beginning of the New Economic Policy in 1921, the State Bank of the RSFSR which was later transformed into the USSR State Bank was founded. Some specialised state banks such as the Foreign Trade Bank and the Agricultural Bank were set up around this time. During the period of the New Economic Policy, the state monopoly of banking was temporarily forgotten and some private credit organisations in the form of mutual credit societies were allowed to be set up.2 However, these institutions were phased out by the end of the 1920s.

The socialist system of banking could be characterised as a mono-bank system in contrast with a two-tier banking system of state banks and commercial banks. The State Bank (gosbank) of the USSR, being the issuer of money, together with a selected number of specialised banks such as the Foreign Trade Bank and the Workers’ Savings Bank, was the sole credit institution. The State

1O.Kuschpeta, The Banking and Credit System of the USSR, Leiden 1978, pp.17-21.

2G.A.Tosunian et al., Bankovskoe pravo Rossiiskoi Federatsii, obshchaia chast’, Moscow 1999, pp.272-303.

out of the money accumulated in particular branches of industry.6 By the end of 1990, the number of “commercial banks” exceeded one thousand.7

The question was where the initial capital for these “commercial banks” came from. “Ministries, state committees, large state enterprises, government organs, state nancial institutions, the Communist Party af liates” – these were the entities which were already doing business on their own account. In reality, banks which mushroomed after 1988 were mainly “wildcat” banks formed by state enterprises and local governments.Approximately fourfths of all Russian commercial banks were set up by one or more state enterprises. For example, Gazprom created the Gazprom Bank. Toko Bank, which went bankrupt in 1998, but until then was the 6th largest commercial bank, was founded by Gossnab, the state supply and distribution system. Oneksim Bank was created by large foreign trade organisations.

Banks primarily accepted deposits from the shareholders and borrowed on the cheap inter-bank credit market to nance their own enterprises. Those banks applied for credits at subsidised rates from the State Bank and used this money to extend loans to the state enterprises.8 Major source of the banks’ capital was free credit resources held in the accounts of the clients, who were, at the same time, the shareholders of the bank.

Banking and industrial capitals were integrated in the way that major energy and export enterprises and conglomerates became the founders (shareholders) of many banks and at the same time, their partners. For instance, in 1993, Promstroibank’s 30 largest shareholders were all clients.9 Many of them operated as “pocket banks” of the state enterprises which created them.Also there is little doubt that the capital accumulated in the “second economy” under socialism poured into these banks.10 These banks helped their clients convert their stateowned assets into cash, circumvent foreign exchange regulations and transfer pro ts to offshore accounts.11 As one observer later put it rightly, “Russian banks were distorted from the beginning”.12

The reform of state banks belatedly followed. With the collapse of the Soviet Union, the Central Bank of the Russian Federation (Bank of Russia) was founded in 1990 on the basis of the RSFSR Bank which was founded as part of the USSR

6 N.D.Eliashibili, Bankovskoe pravo, Moscow 1999, p.6.

7 Tosunian, supra, pp.323-329.

8Johnson, supra, p.979.

9W.Tomspon, “Old Habits Die Hard: Fiscal Imperatives, State Regulation and the Role of

Russia’s Banks”, Europe-Asia Studies, 1997 No.7, p.1170.

10T.Gustafson, Capitalism Russian Style, Cambridge 1999, p.81.

11Ibid., p.83.

12Ibid.

State Bank earlier that year. The USSR State Bank was formally abolished and its assets and debts within the territory of the RSFSR were transferred to the Bank of Russia in 1991. At the RSFSR level, on December 2, 1990, the Law on the Central Bank of the RSFSR, and the Law on Banks and Banking Activities were enacted. The latter is still in force with subsequent amendments.13

In the rst half of the 1990s, “commercial banks” continued to increase in number. From 1993 to 1996, the number of registered credit organisations increased from 1,700 to 2,600.14 In the period of high in ation, these credit organisations became accustomed to a fast-and-loose style closer to loan-shark- ing, currency speculation, and arbitrage than conventional banking.15 Ensuring access to soft credit for the state enterprises which founded them was the banks’ major task. Their managers were more concerned with the interests of the enterprises which controlled them, rather than with the soundness of their banks.16 On the other hand, banks did not pay interest for around 70% of the total liabilities. This included budgetary organisations’ accounts, which, since 1993, the state had allowed commercial banks to handle.17 In a word, Russian banks did remarkably little to attract funds, subsisting largely on the basis of resources made available to them at little or no cost, and did relatively little lending except to the state.18

In 1996, of the 2,600 registered banks, 2,213 were operating. There were two distinctive characteristics of the system. Firstly, there was an increasing concentration of assets in a small number of large banks. Of the registered banks, there were 64 banks which had a capital of 30 million roubles or more. On the other hand, a great majority of banks were undercapitalised. Secondly, the “integration of banking and industrial capital continued to grow.19 The number of withdrawals of licences had been strikingly high in Russia even before the nancial crisis, re ecting the dubious nature of some of the banks. In 1995, 45 banks had their license revoked.20

In 1998, Russia fell into a serious nancial crisis which led to the default on government securities and subsequent devaluation of the rouble. In 1993, the government started issuing government bonds (GKO), which was followed by

13Law No.395-1 of December 2, 1990.

14“Vankovskii krizis: tuman rasseibaetsia?”, Voprosy ekonomiki, 1999 No.5, p.5.

15Gustafson, supra, p.87.

16Tompson, supra, p.1171.

17Ibid., p.1165.

18Ibid., p.1176.

19S.V.Bazhanov et al., Possiskie banki: proshloe i nastoiashchee, St.Petersburg 2004, pp.214215.

20K.T.Tifomirov, Postateinyi kommentarii k Federal’nomu zakonu “O nesostoiatel’nosti’kreditnykh organizatsii”, Moscow 2001, p.IX.

Federal loan bonds (OFZ)s. The government heavily relied on these instruments to keep the economy a oat. In 1996, the government allowed non-residents to participate in the government bond market. In 1997, non-residents held around 30% of the GKO-OFZs, which exceeded the amount of gold reserve of the Russian Federation.

Dif culties in controlling public nances, the increasing reliance on the government on short-term debt issuance, falling commodity prices and the appreciation of the exchange rate cast doubts on Russia’s debt servicing capabilities in late 1997 and the rst half of 1998.21 Foreign investors lost con dence in the GKO-OFZs and the rouble fell sharply in 1998. Various causes of the nancial crisis in Russia have been pointed out. These include the general deterioration of the economy, the growing government de cit (the government de cit averaged 7.5% of GDP, while fair and ef cient tax collection has yet to emerge), the increase in foreign debt, and the weak banking sector which was unable to play the role of nancial intermediation.22 The interest rate reached 150% by May 1998. In July 1998, the exchange rate fell further, and capital freight started. The government suspended the issuing of GKO-OFZs.

On August 17, the government announced that the 1) the devaluation of roubles, 2) the suspension of trading in GKO-OFZs and a mandatory rescheduling of government debts, i.e. de facto default on the bonds, and 3) a 3 months’ moratorium on the repayment of corporate and bank debt to foreign creditors.

The overall nancial crisis hit the banking sector hard. The Russian banking system had been in a critical state as early as autumn 1997. The fall of the rouble seriously affected their capability of repaying debts in foreign currency, the amount of which had been steadily increasing. In many banks, GKO-OFZ formed a large portion of the assets. Banks often used these government bonds as collateral for foreign currency loans, but with the fall in the market, creditors demanded additional security. Many banks simply could not afford it.

In May 1998, Toko Bank, which was one of the larger banks, got into crisis and eventually had its licence withdrawn. Top ranking banks such as the Imperial Bank and the SBS Agro Bank defaulted in August. By then, there were 511 loss making banks. In this month alone, 140 credit organisations collapsed. There was a “run on the bank”.23

However, the government default and devaluation of roubles, merely triggered the failure of the banks. The systemic crisis of the banking system had

21Bank for International Settlments, 69th Annual Report, 1999, p.50.

22In general, see T.Malleret et al., “What Loaded and Triggered the Russian Crisis”, Post-Soviet Affairs, 1999 No.2, p. 107ff. Tosuniain, supra, pp.330-338.

23“Russia’s Banking Crisis”, Russian Economic Trends, 1998 No.3, p.39.

been prepared by “economic-, socialand political-legal developments of the country” since 1991.24 The BIS Report pointed out as follows:

Banks have relied on returns from nancial arbitrage created by either the continuous devaluation of the rouble or the large acquisitions of high-yielding government paper. Often, these securities were nanced by borrowing in foreign currency, leaving banks with large open foreign currency standing. By contrast, credit outstanding to the private sector has remained very modest at about 15% of GDP so that a credit culture has not evolved.25

A survey of 18 banks (15 of which are among the 30 largest banks) conducted by the Bank Review Unit of the World Bank in autumn 1998 suggests that the massive failure of the banks was primarily the result of mismanagement of funds by the banks. Connected lending and excessive risk taking in the forex market were the most destructive factors. The main sources of banks’capital de cit were bad loans (45%), followed by forex and transaction losses (37%). The failure of the government to redeem GKOs and OFZs accounted for less than 18%. The survey also revealed that 14 of the 18 banks had negative capital in September – October 1998, and all of Russia’s top ve banks were among them.26

In 1999, the Chairman of the Central Bank stated as follows:

The roots of such a serious crisis de nitely go much deeper. The causes of the crisis are: insuf ciently quali ed management of banking risks, particularly foreign currency risk and credit risk, undercapitalisation of many banks, extreme increase of operations in the nancial market, including pure speculations instead of more labour-consuming and often less pro table operations with the real sectors of the economy. We should also be reminded that the low level of nancial discipline of many borrowers substantially increased the credit risk of the banks.27

In early 1999, the Central Bank reported that a quarter of the existing banks were not sustainable, and 149 of them were “apparently bankrupt”.28 The government was rather slow in responding to the situation. Individual banks were rescued by the Central Bank via cash injection and “repo” loans in a highly opaque manner. It was only in July 1999, almost one year after the crisis, that the Central Bank found the courage to withdraw licences from some of the bigger violators of

24Tosunian, supra, p.330.

25BIS, supra, p.53.

26“Banking Sector”, Russian Economic Trends, 1999 No.2, p.85.

27V.V.Gerashchenko, “Akutual’nye problemy bankovskoi sistemy v 1999 godu”, www.cbr.ru.

28VE, 1999 No.5, p.31.

banking regulations and credit rights.29 The Central Bank came under signi cant political pressure in the process. In the case involving the Imperial Bank, which held Gazprom and Lukoil accounts, but had made headlines for theft and asset stripping, the Bank had its licence revoked in August 1998. In June 1999, however, the licence was reinstated as a result of the appeal of the Minister of Fuel and Energy and major creditors to the Central Bank.30

In September, the government introduced measures to restore the banking system. The Central Bank provided “stabilisation loans” to banks which could be expected to recover, and banks which had high economic and social signi cance, particularly for the regions. According to the Central Bank, 70% of the operating banks survived the crisis. On the other hand, around 400 banks experienced serious shortfall in capital, could not pay the customers, and were unable to come out of the crisis on their own. Many of them disappeared as a result of merger or bankruptcy.31

In February 1999, the long-awaited Law on the Insolvency of Credit Organisations was enacted.Anew agency –Agency for Restructuring of Credit Organisations (ARKO) – was founded in March.32 The board of ARKO included representatives of the government, the Central Bank, and the Association of Russian Banks. The Law on the Restructuring of Credit Organisations, which sets out the procedure for restructuring credit organisations by ARKO, was enacted in July 1999.33 ARKO started the process of restructuring 20 banks in 12 regions such as SBSAgro andAvtoVAZ Bank by taking control of these banks and injecting funds into their capital.

In the aftermath of the crisis, bank owners and managers had been given plenty of time to strip assets from the banks by transferring them into “bridge banks”.34 This happened, for example, with Bank MENATEP, which was thefth largest bank in Russia. By the time the Law on the Insolvency of Credit Organisations was adopted, the Bank was reduced to a mere shell whose assets had been transferred to an independent “sister bank” which continues to operate. Some of the assets had been hidden abroad.35

29“Banking sector”, Russian Economic Trends, 1999.2, p.87.

30A.S.Alexandrovich, “Bankruptcy Law, An Economic Medicine: How Russia’s New Bankruptcy Legislation Facilitated Recovery From the Nationwide Financial Crisis of August 17, 1998”, Cornell International Law Journal, 2001, vol.34, pp.110-112.

31Bazhanov, supra, p.229.

32Law No.144-FZ of July 8, 1999.

33Law No.40-FZ of February 25, 1999.

34K.Eggenberger, “Bank Restructuring: Developments in 1999”, Russian Economic Trends, 1999 No.4, p.27.

35Alexandrovich, supra, p.108.