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Derivatives in Russia - Further Troubling Developments

June 2013

Case A40-92297/11-46-801 between LLC “Hermitage Development” as the plaintiff and ZAO “Unicredit Bank” as the defendant and Case A40-55358/12-100-391 between LLC “Agroterminal” as the plaintiff and ZAO “Unicredit Bank” as the defendant.1

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, say critics, shows a fundamental misunderstanding of how derivative contracts operate.
The Russian subsidiary of Unicredit Bank (Unicredit) and a Russian company, LLC “Hermitage Development” (Hermitage2), entered into the Master Agreement on General Conditions of Performing Derivative Transactions governed by Russian law (the Master Agreement) 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 Federation3 were also denied.
The courts’ reasoning was the same. The courts all concluded as follows:

  • in accordance with Article 450 of the Russian Civil Code, an agreement can be terminated unilaterally if “such right is contemplated by … an agreement”;
  • the courts referred to clause 12.3 of the Master Agreement, which provided for “a right of any party to terminate the Agreement at any time if there are no outstanding obligations”;4
  • the courts analysed the terms of the interest rate swap (as it was documented in the confirmation under the Master Agreement) and concluded that, until the next payment date (which falls quarterly) when the reference interest rate (linked to LIBOR) is identified and the amounts payable by each party are calculated, each party does not have any payment obligations to the other;
  • if there is no payment obligation at all, there is certainly no “outstanding obligation”, thus the Master Agreement could be terminated unilaterally, as requested by Hermitage.


This decision has shocked derivative experts and commercial parties.
Since the early 1990’s, there have been many attempts by market participants to use the English law governed ISDA Master Agreement in the Russian market. For many years there were doubts as to the viability of derivative transactions under Russian law. Despite various obstacles, however, supporters of derivatives succeeded in creating a Russian language equivalent of the ISDA Master Agreement governed by Russian law (RISDA). In addition, new legislation was enacted during 2011-2012 to make netting provisions enforceable under Russian law. Just when it appeared that there may be a firmer legal foundation in Russia for derivative transactions, a decision such as the one reported above once again threatens to undermine this.

Critics of this decision point to the Russian courts apparently failing to appreciate that under an interest rate swap (as well as under other derivative instruments) parties undertake obligations for the “life” of the transaction, so even if there is no outstanding specific payment obligation, the nature of derivative transactions is such that there are always future obligations which bind the parties for the full duration of the derivative transaction. If a party fails to perform any of its obligations (which results in the occurrence of a termination event), it has to pay to the other party the replacement costs of entering into a transaction equivalent to the terminated one calculated in accordance with the provisions of the Master Agreement. The Russian courts’ view, contrary to the provisions of the Master Agreement and market practice, encourages a party to a derivative transaction which is “out-of-money” to simply walk away from a contract which has become commercially unattractive, leaving its counterparty with losses.

This unfortunate precedent may revive the tendency to mitigate Russian risks by using an English law ISDA Master Agreement more often. This will be a frustrating result for those who spent the time and effort developing the RISDA.
The important practical lesson which should be derived from this decision is that when market participants use legal documentation based on RISDA, they should keep in mind the extremely formalistic approach of Russian courts to interpreting the text of a contract and ensure that it does not have any ambiguous or unclear provisions.
The good news is that the Russian derivatives market participants (who developed RISDA in the first place) have already revised the relevant clause in RISDA to make it clear that a unilateral termination of RISDA is not possible unless there are no outstanding transactions thereunder.


1. Since the facts and arguments used by the parties in both cases are almost identical, in this article we discuss the “Hermitage Development v Unicredit” case which was the first to be decided by courts.
2. This “Hermitage” has nothing in to do with the Hermitage Capital Management of Bill Browder.
3. The highest judicial authority in Russia.
4. Please note that this article is based on the information contained in the published court decisions and we did not have access to the actual documents that the parties submitted to, and were considered by, the courts.

Further information

This case summary is part of the Allen & Overy Litigation Review, a monthly update on interesting new cases and legislation in commercial dispute resolution.  For more information please contact Amy Edwards,, tel +44 (0)20 3088 2243.