Lukashenka Regime Gets Default Notification

• 23.01.2024, 11:29

If the regime does not repay the obligations, Russian investors will initiate proceedings in the London Arbitration Court.

On January 18, a group of investors consisting of eight individuals and five companies sent a notice of default to the head of the Ministry of Finance of Belarus Yury Seliverstau on five issues of Eurobonds — Belarus 2023, Belarus 2026, Belarus 2027, Belarus 2030 and Belarus 2031. The initiative group owns the securities for a total of $178 million, according to a letter addressed to the head of the Belarusian Ministry of Finance.

The grand total is about $3.25 billion.

Investors are considering the possibility of applying to the London Court of International Arbitration (LCIA) with a claim to recover payments on Eurobonds from Belarus, a representative of the initiative group told RBC.

Direct payments on these bonds to Russian investors have been suspended since 2022, but at the end of 2023 payments to Russian investors under the new mechanism began. These payments will be made only for the issue of Belarus 2023 and only to holders who bought securities before September 6, 2022.

"The default of the Republic of Belarus on the Eurobonds was the result of the failure of the Council of Ministers of the Republic of Belarus and the National Bank of the Republic of Belarus to fulfill their obligations to repay the Eurobonds and/or pay interest coupons on them," investors state in the notice. In the text of the document, they also note that the new payment mechanism proposed by Minsk "is discriminatory" and violates the interests of holders who bought securities after September 6, 2022.

"We call on the Council of Ministers of the Republic of Belarus and the National Bank of the Republic of Belarus to fulfill their obligations to all Russian investors in full, which will further preserve the interest and confidence in external public borrowing of the Republic of Belarus," the appeal addressed to the head of the Ministry of Finance of the Republic reads.

If the Lukashenka regime does not repay the obligations, as required by the notice, investors will have the right to file a lawsuit with the London Court of International Arbitration or the Arbitration Court in the Russian Federation, a representative of the group of investors said. According to him, such options are being considered together with lawyers.

"The application for default is filed in strict accordance with the rules of law and emission documentation. At the same time, the validity of the default does not depend on the consent or disagreement with it on the part of the Republic of Belarus and any objections from Belarus," says Vladimir Pestrikov, the Partner for the Dispute Resolution Practice from the Rybalkin, Gortsunyan, Dyakin and Partners (investors' representatives).

What's the purpose of a default notice?

Russian investors have been experiencing difficulties in obtaining payments on Eurobonds of Belarus since the summer of 2022 — after Citibank refused to perform agent's functions for these securities. At first, the Belarusian side said that it would look for a new agent to resume payments, then began to conduct them through its own infrastructure, inviting Russian investors to open accounts in Belarus and receive money for them in Belarusian rubles. But only a few investors were able to receive payments under this mechanism and not in full, said Sergey Sazonov, head of the "Eurobond" direction of the Bond Owners Association. Then the Lukashenka regime proposed a new payment scheme through the Russian National Settlement Depository (NSD), but also in Belarusian rubles and only to investors who bought securities before September 6, 2022 (on this day Citibank's refusal to service the securities came into force). According to Sazonov, payments started coming at the end of December 2023.

In July 2022, the rating agency Moody's defaulted on coupon payments on Belarusian Eurobonds made in Belarusian rubles and downgraded the country's rating to C (the lowest according to the agency's scale). Other international agencies — S&P Global Ratings and Fitch — suspended the assessment of the credit quality of Belarus. The Russian ACRA Rating Agency withdrew the rating of Belarus in November 2023. They did not state a default on any of the Eurobond issues.

The issue documentation on Eurobonds of Belarus states that either the nominal holder of Eurobonds, Citivic, which is part of the Citibank group (the official registrar, financial, payment and transfer agent for Eurobonds), or the final holders of Eurobonds can declare a default, according to a comment by private investors for RBC.

"The Ministry of Finance of Belarus does not recognize bonds as default bonds, and this allows the Ministry of Finance not to make an immediate payment on the bonds. The bondholder has the right to send a notice of default to the issuer, in this case the issuer will be obliged to immediately repay the debt," says lawyer Aram Grigoryan, a partner of the NSP law firm. By sending the notification, investors do not expect immediate payment from Minsk, but for the purposes of litigation they need to go through this pre-trial stage, the expert explains.

According to the prospectuses for the issue of Belarusian Eurobonds, the holder of securities can send a default notice in case of delay in payments for more than 14 days, said the lawyer of the Pen & Paper Bar Association Roman Kuzmin. "After the presentation of such a notice, the maturity of the nominal value of the bond comes, which is critical for the issuer, since this is always a large amount, for the payment of which funds are formed in advance," the lawyer explains.

"The LCIA decision is recognized and can be enforced in most countries of the world in relation to the assets of the Republic of Belarus. The decision of the Russian court (if investors decide to sue in Russia. — Note) can be recognized in various countries of the world and, above all, in the CIS countries. In the CIS countries, decisions of Russian courts are recognized and enforced in a simplified manner in accordance with the Convention on Legal Aid and Legal Relations in Civil, Family and Criminal Cases," Pestrikov added.

What are the chances of investors winning against Minsk in a London court

"If Belarus refuses to recognize the default on Eurobonds, then Eurobond holders will be forced to apply to international arbitration (LCIA) or courts for the protection of their rights and interests and the recovery of debt on Eurobonds from Belarus," the group of investors said in a comment.

The possibility of conducting proceedings in the London Court of International Arbitration is spelled out in the Issuer's documentation. Minsk previously proposed to consider the dispute in this court in the framework of a lawsuit with another private investor who did not receive payments on Eurobonds.

Also, two investors previously appealed to the Russian courts with an application for recovery of payments from Minsk. The Moscow City Court stopped considering such an application, citing lack of jurisdiction, and the Arbitration Court of the Kemerovo Region engaged in such proceedings and ruled to seize payments on Belarusian Eurobonds to a Russian private investor.

Grigoryan calls the LCIA proceedings a more preferable option, since it is this court that is indicated in the emission documentation. “This dispute is arbitrable and not subject to any restrictions. Investors may well be able to pay the arbitration fee and other costs associated with the dispute. This is an exclusively organizational issue, and EU/US sanctions in this case should not interfere with investors' plans," the expert says. It is possible to file a lawsuit in a Russian court, but there are no positive decisions on such cases yet, Grigoryan notes.

On the one hand, litigation in Russia can potentially be more successful for investors. “Since Russian courts take a more favorable position towards persons affected by Western sanctions than foreign courts,” says Kuzmin. But on the other hand, the LCIA clause in the documents says that when filing claims in a state court, such statements should be returned, the expert notes.

"Meanwhile, the Russian procedural legislation has mechanisms that allow transferring the place of consideration of the dispute from abroad to the Russian arbitration court. We are talking about Art. 248.1 of the Arbitration Procedure Code of the Russian Federation, which refers to the exclusive competence of disputes involving a defendant registered in a foreign state that has introduced restrictive measures against Russian citizens,” adds Kuzmin.

In addition, investors may consider filing a lawsuit against Belarus in the framework of international investment arbitration. "Since in fact the Republic of Belarus encroaches on investments in the Belarusian economy made by Russian and foreign investors," notes Ilya Rachkov, partner of the NSP law firm. To file such a claim, it is necessary to prove that the plaintiffs themselves are investors, and their investments in Eurobonds of Belarus are investments within the meaning of the Treaty on the Eurasian Economic Union. Also, investors need to prove that by refusing to pay, Minsk violated their rights. "In particular the right to protection against expropriation, non-payment on Eurobonds is equivalent to expropriation," explains Rachkov. In this scenario, the claim can be considered in the International Commercial Arbitration Court at the Russian Chamber of Commerce and Industry (but this option requires the consent of Belarus), in the International Center for Settlement of Investment Disputes or in the State Court of Belarus (this option is the least successful for investors), the expert lists.