Oda Russian Commercial Law 2007-1

i)minimum capital;

ii)proportion of proprietary contribution to the capital;

iii)maximum risk to a single borrower or group of interrelated borrowers;

iv)maximum amount of major credit risk;

v)liquidity of the credit organisation;

vi)capital adequacy;

vii)foreign currency, interest rate and other nancial risks;

viii)minimum amount of reserve;

ix)use of the capital for the acquisition of shares in other juridical persons;

x)maximum amount of loans and guarantees extended to its shareholders.

Details of these numerical requirements are given in the Instruction No.114-I of the Central Bank of January 11, 2004.

Most of these requirements had already been in place before the 1998 crisis. However, it turned out that many banks, including the top 15 banks, had actually failed to meet these requirements. This is presumably due to the lack of transparency in the banks’ accounting system and lax supervision by the Central Bank. The report of the Central Bank on the inspection of banks in the rst half of 1998 (i.e. the period immediately leading to the banking crisis) revealed various violations and non-ful lments of the prudential requirements. “In many credit organisations, the capital was arti cially in ated by an inaccurate re ection of the nancial activities on the balance sheet”. “In almost all credit organisations, the true nancial state of the borrower was not evaluated”.Arranging of security for lending was also reportedly inappropriate.62

The failure of the Central Bank in supervising credit organisations was duly acknowledged by the Bank in the “Basic Directions of Uni ed State MonetaryCredit Policies for 2001”. The Bank declared that:

Measures to improve the requirements for the licensing of credit organisations should be taken. Special care should be taken in analysing the nancial state of the founders of the institution and examining the possible in uence of interrelationship between the founders. The Bank intends to analyse more carefully the structure of the real owners of credit organisations and the capability of the institutions to implement prudential regulations after the reorganisation procedure, and more strictly assess the quality of bank management......The Bank intends to strengthen supervision so that the real state of affairs of credit organisations is re ected on the accounts and reports... Efforts should be continued to oust those banks from the market which do not have the capability to survive and whose existence in the mar-

62 Informatsionnoe soobshchenie of the Central Bank, August 20, 1998.

If the credit organisation in question fails to comply with the order of the Bank to remove violations, and also in cases where the violation or the operation by the institution created a real threat to the interest of the depositors, the Bank is empowered to:

i)impose nes up to 1% of the paid-in capital (but less than 1% of the minimum capital);

ii)demand the credit institution to implement measures for nancial rehabilitation, including restructuring of the assets, and/or replacement of the management;

iii)change the mandatory numerical requirements for the institution for the period of up to 6 months;

iv)prohibit the credit institution from performing banking operations included in the licence for up to 1 year or prohibit opening of a branch for the same period;

v)initiate temporary administration for up to 18 months;

vi)withdraw licence.

(Art.75, the Law on the Central Bank)

Table 12 Measures applied to Credit Organisations in 2004

(Central Bank, 2004 godovoi otchet, p.232)

v)failed to ful l the liquidity requirement for more than 10% in the past 10 months (Art.4).

These preventive measures are applicable when “defects of the activities of the credit organisations do not directly threaten the interest of creditors and depositors”.68

If the grounds for preventive measures emerge, the management of the credit organisation is under an obligation (under the threat of criminal penalty) to take these measures. The Central Bank is empowered to demand that the credit organisation in question takes those measures if any of the above grounds emerge, and also to initiate interim administration (Art.3, para.2).

1)Financial Restoration

Financial restoration can take the following forms (arts.7 and 8):

i)granting of nancial assistance to the credit organisation by the founders and other persons;

ii)changing of the structure of assets and debts;

iii)changing of the organisational structure.

The changing of the structure of assets and debts includes the improvement of loan portfolio, curtailing of costs and expenses of management, and sale of assets (Art.9). The changing of organisational structure includes shedding personnel and abolition of subdivisions and branches (Art.10).

2)Interim Administration

Interim administration is a procedure initiated by the Central Bank which is introduced when credit organisations have:

i)failed to satisfy a monetary claim of a client and failed to make mandatory payments for more than seven days, due to absence or insuf ciency of funds in the corresponding account,

ii)allowed absolute decrease of its own capital by 30% as compared to the highest amount in the last 12 months and at the same time, failed to satisfy one of the numerical requirements of the Central Bank,

68 Tro mov, supra, p.11.

organisations to the level to meet the capital adequacy requirement or increase the capital (Art.10).

ARKO has the power to:

i)take measures for nancial restoration of credit organisations;

ii)increase and decrease the capital of credit organisations;

iii)take decisions of the reorganisation of credit organisations;

iv)sell or otherwise dispose of the shares of credit organisations which belong to ARKO;

v)initiate an action in court for recognising transactions effected by credit organisations within the last three years as null and void;

vi)extend loans, place deposits, provide security, and other nancial assistance to credit organisations;

vii)implement other measures to restore the nancial status of credit organisations;

viii)implement procedure for liquidation of credit organisations. (Art.14, para.1)

However, it is reported thatARKO lacks the necessary resources to complete its task, and the power struggle with the Central Bank continually impairsARKO’s work.69

69 Alexandrovich, supra, p.104.

12

NATURAL RESOURCES LAW

1THE OWNERSHIP OF SUB-SOIL RESOURCES

The present Constitution of the Russian Federation has two relevant provisions on natural resources. One involves the ownership of natural resources and the other relates to their possession, use and disposal.

In the socialist period, natural resources were exclusively owned by the state. In contrast, the Constitution of the Russian Federation of 1993 provides that land and other natural resources are used and protected in the Russian Federation as the basis for the life and activities of the people who live in the territory. They may belong to private, state, municipal, or other forms of ownership (Art.9). Natural resources in this context include land, sub-soil, water resources, forest and other plant resources etc.1

However, the provisions of the Civil Code and other laws are slightly different from the Constitution. The Civil Code provides that land and other natural resources which do not belong to individuals, juridical persons, or municipalities, are state property (Art.214, para.2). Thus, there is a “presumption of natural resources as state property”. Furthermore, while land can be owned by individuals and juridical persons by virtue of the Land Code, the Sub-soil Law provides that sub-soil including the underground space as well as useful minerals (iskopaemoe), energy and other resources are state property.

The Civil Code provides that land and other natural resources can be assigned or transferred to another person in so far as it is permitted by law (Art.129, para.3). However, the Sub-soil law declares that sub-soil blocks may not be an object of purchase and sale, gift, inheritance, contribution, pledge, or be assigned in any other manner. The right to use sub-soil, on the other hand, can be assigned to the extent permitted by Federal law (Arts.1-2, para.2). In contrast with unextracted resources, resources which have been extracted may remain

1V.V.Lazarev, Nauchno-prakticheskii kommentarii k Konstitutsii RF, Moscow 2001, p.63.

under the ownership of the state, constituent entities, and the municipality as well as to private entities.

Another provision in the Constitution which concerns natural resources is the provision on the demarcation of the power of the Russian Federation and the constituent entities. There are matters which fall within the exclusive jurisdiction of the Federal State and which fall within the joint jurisdiction of the Federal State and constituent entities. “Possession, use and disposal of land, sub-soil, water and other natural resources” the joint jurisdiction of the Federal State and constituent entities (Art.72, para.1).

In the period of separatism of constituent entities in the 1990s, there was a controversy between the Federal government and constituent entities over the control of natural resources. The provision of the Constitution on the joint jurisdiction over their possession, use and disposal, is an outcome of compromise between the Federal government and the regional powers. The assertion of power by the regions on natural resources can be seen in the laws of various constituent entities which contradict the Federal Constitution and law. The Sub-soil law of the Komi Republic of 1992 has many original provisions which directly contradict the Federal law.2 The Constitution of the Republic of Altai which declared that land, sub-soil and other natural resources were the property of the Republic which was found to be unconstitutional by the Federal Constitutional Court in 2000.3

This system of joint jurisdiction over natural resources was re ected in the 1995 Production Sharing Law which adopted the “dual key system” in which both the Russian Federation and the relevant constituent entities were given power to sign the agreements. However, under the Putin administration, the Law was amended in 2004 and now, only the Russian Federation is the party to the production sharing agreement. The same applies to Sub-soil Law which was amended in 2005 to abolish the dual key system.

2THE SUB-SOIL LAW

The basic law in the area of natural resources is the Sub-soil Law (zakon o nedrakh). Since the Tsarist period, this area of law had been called “mining” law, e.g. the Mining Statute (Gornyi ustav) of the Russian Empire and the USSR Mining Statute (Gornoe polozhenie) of 1927. The term “subsoil (nedra)” came to be used widely since the Principles of Legislation on Sub-soil of the USSR

2 A.I.Perchik, Gornoe pravo, second edition, Moscow 2002, pp.44-61.

3Decision of the Constitutional Court, June 7, 2000, No.10-P.

and Constituent Republics of 1976, followed by the RSFSR Sub-soil Code. However, “Russian jurisprudence was not ready for the development of indigenous mining legislation and the utilisation of foreign experience was needed” at the time of the collapse of the socialist system. Nevertheless, according to a Russian specialist, a suf cient body of laws regulating the use of sub-soil has developed in 5-6 years.4

The Sub-soil Law which was enacted in 1992 was the rst piece of such legislation in the post-socialist period. Although this Law was not dissimilar to the 1976 Law, there was a major novelty, i.e. the introduction of the licensing system for the use of sub-soil. The use of sub-soil has always been subject to permission since the Tsarist period. The same applied to the 1927 Statute, although it was based upon a contractual system whereby the terms of use were agreed in a contract with the government. However, with the end of the New Economic Policy, sub-soil was provided to enterprises simply through administrative procedure. The 1992 Law did not return to the contractual model, but formalised the administrative procedure of providing sub-soil by introducing a single licensing system.

Since the 1992 Law was fairly general and actually a rework on the 1976 Law, a major reform soon became necessary. In 1995, a new version of the 1992 Law was enacted.Although it took the form of the amendment of the 1992 Law, practically all the provisions were amended, and some new provisions were introduced.5

The Sub-soil law provides for the use of sub-soil based upon the licensing system, but also refers to production sharing which is regulated by the Production Sharing Law.

Sub-soil block is provided to investors on the basis of a license or a production sharing agreement (Art.7).

The use of a speci c block can be restricted or prohibited on the ground of national security and protection of the environment (Art.8). An example is the restriction based upon the Law on the State Border which requires that commercial activities in the border area which involve border crossing or other interests of the state not to harm the health of the inhabitants, the ecological and other security of the RF as well as of the neighbouring countries, or obstruct the maintenance of the state border or the activities of the border control.

Those who are entitled to use sub-soil are “entities of entrepreneurial activities” including simple partnership (prostoe tovarishchestvo), foreign individuals and juridical persons” (Art.9). Simple partnership is de ned in the Civil Code

4 A.I.Perchik, Gornoe pravo, second edition, Moscow 2002, pp.11-12.

5Ibid., p.101.