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By John Helmer, Moscow

A year ago the Bank for International Settlements (BIS) reported that through the statistics collected by its 60 associated central banks, total bank lending to Russia had jumped by $25 billion in the January quarter. That was the largest quarterly increase of Russian lending and borrowing in BIS records. It was also a sign of the growing integration between Russia and the economies of the rest of the world.

This year, the US Government has decided to put a stop to that, and declared war on Russian individuals and Russian corporations. In part, this has been done by issuing transaction ban and asset freeze orders of designated individuals and institutions; in part, by legislating the authority for the US President to attack the economic means of any individual of Russian nationality or association; and in part, by advertising in the Financial Times and The Economist the intention to attack the entire Russian economy until capitulation.

At the same time, the US banks say they are entitled to business-as-usual repayment of $36.7 billion in Russian liabilities recorded by BIS as of September 30. That is 15% of the $242 billion in total lending to Russia by BIS-covered banks. The four largest US lenders — Citi, Bank of America, JP Morgan Chase, and Wells Fargo – say their Russian exposure by the end of last year was $20.7 billion. That compares with European bank exposure of $184 billion, and Japanese bank exposure of $16.3 billion.

What happens if the Russian targets declare the US sanctions to be force majeure, and the Russian government issues corresponding orders to suspend debt service obligations and prohibit repayment to the US banks?

One international banking source responds that the US banks will be required to write down on their balance-sheets the full $36.7 billion — as if the money is lost. Some Russian and international lawyers say the US banks and their Russian targets will have to go to a court — jurisdiction determined by the loan agreements — to decide whether the repayment of the debts can be lawfully suspended in these circumstances. In the meantime, all US banking to Russian institutions is likely to be frozen – no new credit lines will be drawn, no debt instalments paid, no refinancings signed.

Other lawyers argue that if the Kremlin, the Ministry of Finance, and Central Bank of Russia issue orders prohibiting Russians from servicing US bank debts, the suspension of $36.7 billion in repayments will be lawful, and for the time being, obligatory.

On March 4, a Kremlin official was reported by Reuters as “warn[ing] that if the United States were to impose sanctions on Russia over Ukraine, Moscow might… refuse to pay off any loans to US banks.”

glazyevThe official was Sergei Glazyev, an economist and political advisor since General Alexander Lebed challenged President Boris Yeltsin for the presidency in 1996. In 2012 Glazyev was appointed by President Vladimir Putin to be special advisor for “coordinating the federal executive authorities’ work on developing Eurasian integration within the framework of the Customs Union and the Common Economic Space between the Russian Federation, Kazakhstan, and Belarus.”

What Glazyev said on March 4 was: “We will have to go into other currencies, create a cash- payment system. We have excellent trade relations with our partners in the East and the South, and we will find a way, not only to reset our financial dependence on the US. , but we will come out of these sanctions with great advantage. Trying to announce sanctions against Russia will turn to the collapse of the US financial system, and that will lead to the termination of US dominance in the global financial system. If sanctions are applied against state structures , we will be forced to recognize in actual fact the impossibility of the return of those loans given to the Russian structures by US banks. Indeed, sanctions [are] a double-edged weapon. If the United States were to freeze our assets, then accordingly, the liabilities of our organizations in the US will also be frozen. This means that our banks and businesses will not return loans to their US partners.”

When these remarks appeared on the RIA Novosti website, Glazyev was immediately attacked by other officials. A senior Kremlin source, reported the news agency, called Glazyev’s remarks “his personal opinion, which does not match the position of the Kremlin”. He added that Glazyev was speaking as an academic, not as a presidential adviser. An official in prime ministry was reported as saying: “Nobody empowered Glazyev to speak on behalf of the Russian government, and certainly not to propose obviously unacceptable measures.”

Glazyev has always had his detractors inside the Russian government and out. Still, on March 12, when Putin called a meeting to assess the sanctions threat to the Russian economy, Glazyev (far left) was one of the six participants. The others were Prime Minister Dmitry Medvedev; presidential economic advisor and former Economic Development Minister, Andrei Belousov; Finance Minister Anton Siluanov; Central Bank Governor Elvira Nabiullina; and former finance minister Alexei Kudrin. Not since 1993 when Glazyev was trade minister in Victor Chernomyrdin’s first cabinet has he ranked at this level. Never before has he been so close to the president.


That same day, speaking with reporters Putin said: “Regarding sanctions, it is primarily those who intend to apply them that need to consider their consequences. I believe that in the modern world, where everything is interconnected and interdependent, it is possible to cause damage to another country, but this will be mutual damage and one should bear this in mind.”

Asked this week to clarify whether the Russian government is contemplating a force majeure order, the Central Bank said it lacks the legal authority, but pointed out that in August 1998, when the government defaulted on its bonds and several major commercial banks went bankrupt, the government and Central Bank did invoke force majeure to order a moratorium on debt repayment and several other financial operations.

The legality of force majeure in Russian practice is set out in Section 3 of Article 401 of the Civil Code, where it is defined as circumstances which are “extraordinary and unavoidable under the given conditions. Such circumstances do not include, inter alia, breach of duty on the part of the debtor’s counterparties, the lack of relevant market for the performance of production, the lack of necessary funds of the debtor.” In mid-2011 a legal review of Russian experience with force majeure dismissed material change in circumstances as qualifying, but explicitly included war, threat of war, and the imposition by state action of sanctions. Even then, “these events will release the debtor from liability only if they comply with all the criteria of force majeure and in the presence of a causal connection between their actions and the breach of contract.”

As a legal concept force majeure originated in French law, when it had the strict meaning that performance of a contract was not just difficult or hazardous in unforeseen circumstances, but impossible for good cause. The cause of the impossibility has occupied a century of French legal argument. One cause, on which there has been agreement among lawyers and judges to warrant non-performance according to force majeure, is the acts of the state – war, embargo, executive decrees, statutory prohibitions. For a detailed review of force majeure in European, English and American practice, read this.

The operation of force majeure in English law was set out in November 2002 in a High Court case between a Greek oil trader, an oil refinery in Skopje, and the newly independent Macedonian Government. The judgement declared: “the party relying on the force majeure clause must show that the effective cause of the non–performance of the contract is a request of a governmental authority which that party has acted upon or complied with. That is a question of fact to be determined by looking at all the circumstances in which the non–performance occurred and the governmental request was made.” — see Par 55(4).

In that case, Sir Richard Aikens, then the presiding High Court judge, ruled that the force majeure declaration by the Macedonian government had been contrived by the local refinery for its commercial advantage, probably corruptly, and it wasn’t a genuine cause for non-performance of the contract.

More recently in 2008, the American real estate developer Donald Trump went to court in New York to claim that force majeure prevented his repaying a $40 million personal guarantee to Deutsche Bank. The obligation was part of a $640 million financing for a Chicago construction project. In court Trump claimed the financial collapse of real estate value in the US, followed by the global trade recession, caused force majeure because they were beyond his anticipation or control as a borrower. The court never ruled on the issue. In 2009 Deutsche Bank agreed with Trump to renew his project loan on fresh terms, and Trump started repayments.

Would heavily indebted Russian oligarchs be in a position to try the Trump ploy, and seek suspension of their loan repayment obligations if they are personally designated on a US list, or if their companies are sanctioned by the US Treasury? And what is the legal position of the US and international banks if they stop disbursement of money to designated individuals or their businesses, once money was already contracted for in loan agreements and credit lines signed before the US sanctions began?

President Barack Obama’s statements to date claim the first sanctions list was drawn up to include and punish “specific individuals responsible for undermining the sovereignty, territorial integrity and government of Ukraine.” The first list included Glazyev.

The second list was, Obama said, aimed at “Russian officials — entities operating in the arms sector in Russia and individuals who provide material support to senior officials of the Russian government. And if Russia continues to interfere in Ukraine, we stand ready to impose further sanctions.” That stage has already begun with the targeting of banks whose shareholders have been designated, because some of these shareholders are alleged to be close to Putin.

The Russian individuals and the banks have yet to challenge the legality of the US sanctions in a UK or EU court, where the precedents make likely that the US sanctions will be quashed as illegal. If that process takes time, the courts may grant temporary injunctions to stop the effect of sanctions until there is a trial and judgement.

In the meantime the Anglo-American media have been encouraged by government officials to speculate on the targets of the next round of sanctions. In anonymous US official briefings, these are being called “sectoral sanctions” – meaning Russian metals, energy, engineering, arms, and banking.

When British Prime Minister David Cameron was asked if he would consider adding Russian oligarchs, including Roman Abramovich, to the sanctions list, Cameron replied: “We certainly haven’t ruled anyone out from this approach but the EU approach, and the way it works under the laws that we have, is that you need to target people who have a direct relationship with the action that has been taken.”

Cameron was speaking with calculated ambiguity on whether it would be legal to target Abramovich unless the UK Government had evidence of his “direct relationship” with the events in Ukraine or in Crimea. That Abramovich is bound to defend his legal rights against sanctions Cameron already knew. The Supreme Court judge who recently wrote the newest version of the case law on the application of US sanctions in the UK, Lord Jonathan Sumption, was Abramovich’s advocate in his successful High Court defence against Boris Berezovsky in 2011 and 2012. For Sumption’s judgement on the illegality of US sanctions in the UK, and for a parallel judgement dismissing US sanctions in the European Union, click.

Abramovich has been a public target since Alexei Navalny, the Moscow opposition figure, named him in his proposed sanctions list in a New York Times editorial on March 19. Of Navalny’s 9 candidates for proscription, 5 were on the US Treasury list of March 20.

Abramovich’s Evraz steel and mining group owes a total of $8.3 billion (as of June 30, 2013), with undrawn credit lines of $863 million, including $358 million of credits already committed. The group owns steel and pipe mills in the US states of Delaware, Oregon, and Colorado, and in the Canadian provinces of British Columbia, Saskatchewan and Alberta. The group’s North American headquarters are in Chicago. Altogether, these assets are being carried on Evraz’s books at a value of $993 million. When they were bought in 2007 and 2008, Evraz paid $5.1 billion. At least $3 billion of Evraz’s current debt, or about one-third, is owed for that buying spree. How much of this debt is still owed to US banks is unclear, but it appears to be between $750 million and $1 billion.

Evraz does not issue detailed financial results for its North American division, but according to Evraz’s financial report for the six months to June 30, 2013, sales revenues for North America came to $1.62 billion; that represented 22% of Evraz’s worldwide total. Last October, when Abramovich and his co-shareholders ordered the shutdown of Claymont, their Delaware steelmill, the blame was put by Delaware state officials on low-priced competition from imports originating in the Ukraine.

If Obama were to designate Abramovich for sanctions, the financial impact on these US assets would keep Clayton closed permanently, and be ruinous for the others.

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