Derivatives in Russia — further troubling developments

The Russian courts have allowed a Russian company to terminate unilaterally an interest-rate swap and ‘walk away’ without paying any termination costs. This controversial decision is at odds with market practice and, according to critics, shows a fundamental misunderstanding of how derivative contracts operate.

The Russian subsidiary of Unicredit Bank and a Russian company, LLC Hermitage Development, entered into the Master Agreement on General Conditions of Performing Derivative Transactions governed by Russian law and, on that basis, entered into an interest-rate swap. Hermitage needed the swap to hedge its exposure to a floating interest rate payable to Unicredit under a loan agreement.

After the amount of the loan to be provided to Hermitage was reduced, Hermitage requested Unicredit to also amend the terms of the interest rate swap so that the nominal amount under the swap correlated to the new amount of the loan, but Unicredit refused to do so. Hermitage filed a law suit in Russia against Unicredit requiring the unilateral termination of the master agreement. The court of first instance satisfied Hermitage’s claim, thus leaving Unicredit without any compensation for the termination costs, which could be payable by a terminating party under the terms of the master agreement. Subsequent appeals filed by Unicredit with the higher courts, including the Supreme Arbitration Court of the Russian Federation, were also denied.…

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