Memorandum of Understanding between the Government of the Russian Federation and the Government of the Kingdom of Spain determining basic terms of debt-investment swaps and the Memorandum on the Cooperation in the Financial Sphere between the Government of the Russian Federation and the Government of the Kingdom of Spain determining basic terms of debt-goods swaps were signed in Moscow on May 22, 2001.
MEMORANDUM OF UNDERSTANDING
The Government of the Russian Federation
The Government of the Kingdom of Spain
1.1. General. This Memorandum records the understanding of the Governments regarding the framework to be applied in creating a program for the conversion of Soviet-era sovereign debts of the Government of the Russian Federation owed to the Government of the Kingdom of Spain to private investments in the Russian economy (the "Program").
1.2. Scope of Program. The Program will be based on the purchase of debts referred to in Paragraph 2.1 with the Kingdom of Spain and the discharge of those debts against payments in rubles for use in direct investments in projects within the territory of the Russian Federation. The debt for investment swap mechanism in the framework of this Program is reserved exclusively to firms of Spanish origin.
1.3. Goals of Program. Bearing in mind the fact that the economic performance of the Russian Federation after 1998 crisis is encouraging and the financial situation has improved and this situation allows Russian Federation to completely honour their financial obligations with the International Community, the goals of the Program are (i) to increase the sustainability of Soviet era debt burdens assumed by the Government of the Russian Federation by better matching the debt service obligations of the Government of the Russian Federation to the resources available to it, (ii) to encourage new investment in the real Russian economy that otherwise would not occur, and (iii) to promote Russian-Spanish trade and economic ties.
1.4. Principles of Program. The Program is based upon market principles and to provide appropriate economic incentives to all participants. The Governments recognize that the success of the Program will depend upon clear criteria, transparent operation, and openness to participants.
1.5. Relationship with the Paris Club. Any agreement reached on the basis of the Program will be in accordance with the Paris Club principles and the respect of the multilateral agreements. Therefore any transaction within the Program will be considered and treated on a case-by-case basis. Such kind of programs based on the debt for investment swap mechanism is intended to be made available to all Participating Creditor Countries.
2. Eligible debts
2.1. Soviet-era sovereign debts eligible. Any debt that falls within the Declaration by the Government of the Russian Federation signed in Paris on April 2, 1993, assuming responsibility for debts to foreign creditors of the former Union of Soviet Socialist Republics, and that represents a direct loan from the Government of the Kingdom of Spain or any legally authorized entity or a commercial credit guaranteed or insured by the Government of the Kingdom of Spain or any legally authorized entity will be eligible for conversion under the Program.
2.2. Current and future maturities eligible. The claims eligible for inclusion shall be the debt previously rescheduled under the Bilateral Agreements between the Government of the Russian Federation and the Government of the Kingdom of Spain.
2.3. Debt to be converted. The Governments will approve on a case by case basis the debt to be converted for each specific project and the mechanisms to be used for its approval.
3. Eligible investments
3.1. Identification of potential projects. The Ministry of Finance of the Russian Federation upon consultation with the appropriate agencies of the Government of the Russian Federation and the Ministry of Economy of Spain will approve the projects eligible for the program. The potential investors will present and submit to the Governments the projects to be included into the Program.
3.2. Program intended for projects without market alternatives. The Governments share the view that the Program should not be implemented so as to displace private investment that would have taken place independently or to encourage speculation. Therefore, the investments eligible for participation in the Program should be mainly focussed to those that do not have ready access to ordinary capital markets and would otherwise have difficulty in attracting foreign investment (i.e., those for which a liquid market in their securities does not already exist).
3.3. No restrictions by sector. Subject to the principles of paragraph 3.2. there will be no sector- or industry-based limitations on projects eligible to participate in the Program.
3.4. Program intended for foreign investors. The Governments intend to implement appropriate safeguards to ensure that investors under the Program are not acting on behalf of Russian interests.
4. Selection of projects
4.1. Process. The Ministry of Finance of the Russian Federation and the Ministry of Economy of Spain will review applications to the Program and agree on the proposals to be accepted.
4.2. Pilot projects. The Governments anticipate that a limited number of pilot projects will be identified early in the Program and that technical details of implementation will be finalized in the context of those projects.
5. Procedures for conversion
5.1. Terms of redemption and assignment of debt. Once a project has been accepted, the Ministry of Finance of the Russian Federation and the Ministry of Economy of Spain, upon consultation with their appropriate agencies, will agree the financial terms of the redemption and the assignment of debt with the investor.
5.2. Incentives. The Governments recognize that the Program should operate on the basis of market principles, that private investors must receive appropriate incentives to induce them to participate in the Program and that all parties to the transaction should benefit from the Program. The Governments will consult and cooperate to implement the following principles:
- In order to induce the Spanish investors to purchase the debts, the Government of the Kingdom of Spain should offer them at a price that reflects the market value of comparable obligations of the Government of the Russian Federation.
- In order to provide an incentive to private investors to invest through the Program rather than through the purchase of debt instruments on the open market, the Government of the Russian Federation should provide additional economic incentives in the terms of the redemption of obligations that are reasonable in light of the market value of the underlying debts and the domestic economic benefits generated by the Program.
- The Government of the Russian Federation also will consider a number of regulatory initiatives to encourage investment under the Program, including accelerated regulatory decision-making and licensing for projects under the Program and creation of a favourable legal, tax, and financial environment for the financial transactions and project implementation envisaged by the Program.
6. Administration of projects
6.1. Disbursement. Following the agreement of terms and the assignment of debts to the investor, the investor shall present the relevant claims to the Ministry of Finance of the Russian Federation. The Ministry of Finance shall provide ruble amounts to the investor in accordance with the agreed terms against discharge of the relevant debt. The ruble amounts shall be credited to a special account in the investor's name with an agent bank appointed by the Ministry of Finance, which shall operate the account in accordance with the terms of the Program.
6.2. Use of funds. The Governments acknowledge that the use of funds disbursed under the Program must be restricted to ensure that the goals of the Program are met. The Governments currently anticipate that the following categories of expenditure will generally be acceptable under the Program (though the Governments may by mutual agreement vary these principles in particular projects):
- Purchase of equity interests in existing Russian companies
- Purchase of equity interests in newly privatised companies
- Repayment of loans or taxes owed to the Government of the Russian Federation
- Purchase in Russia of goods, services, or property needed for project implementation.
- Purchase abroad of goods, services, or property needed for project implementation, limited to 20% of Program funds for the project.
6.3. Safeguards. The Governments share the understanding that certain safeguards will be necessary to avoid abuse of the Program and to ensure that the resources committed achieve the goals of the Program. To that end, the following restrictions are generally anticipated, although they will be adopted on a case by case basis depending on the projects:
- The use of funds disbursed under the Program within Russia will be subject to appropriate monitoring and reporting requirements administered by the Government of the Russian Federation through its agent bank.
- Investors'right to re-sell their interests in projects and enterprises acquired under the Program will be restricted for a specified period.
- Re-investment into the real Russian economy of dividends and other proceeds of projects and investments under the Program will be mandatory for a specified period.
- Disbursements from the agent bank account will be linked to the achievement of specified project milestones and will be monitored to ensure proper use under the terms of the Program.
6.4. Duration. The Governments anticipate that the pilot projects accepted under the Program will be implemented quickly, with conversion operations to be completed in accordance with the Program's terms within 12 months.
6.5. National administrative support. The Government of the Russian Federation will endeavour to ensure coordination and administrative support of the projects implemented under the Program. These functions are to be led by a new organization specializing in investment promotion that will monitor projects and assist investors in their successful implementation. The Government of the Russian Federation also anticipates that a special working group chaired by the Head of Administration of the Government of the Russian Federation will, where necessary and appropriate to support investment under the Program, propose amendments to laws of the Russian Federation in accordance with the appropriate procedures.
6.6. Intergovernmental working group. Taking into consideration complexity of the problems related to debt swap mechanism, the Governments will create an intergovernmental working group to analyse each specific project in the light of the principles of this Program and the Paris Club.
7.1. Timing. The Governments intend to continue their discussions on the Program with a view toward implementing the first pilot projects as soon as possible.
7.2. Consultations and notifications. Based on the experience, the Governments intend to consult with the Paris Club of creditors. The Paris Club will be duly notified of any transaction the parties agreed to implement under the Program in accordance with procedures and practice which were applied to in previous transactions.
Signed at Moscow on the 22 of May, 2001, in duplicate in the English languages, both texts being equally valid.
FOR THE GOVERNMENT
OF THE RUSSIAN FEDERATION
FOR THE GOVERNMENT
OF THE KINGDOM OF SPAIN