Owners of Belarusian Eurobonds sent a default notice to Minsk

A group of owners of Belarusian government bonds sent a default notice to Minsk. If Belarus does not repay its obligations, Russian investors plan to begin proceedings in the London arbitration court

A group of investors, consisting of eight individuals and five companies, sent a notification to the head of the Ministry of Finance of Belarus, Yuri Seliverstov, on January 18 (RBC has a copy of the document) about default on five Eurobond issues - Belarus 2023, Belarus 2026, Belarus 2027, Belarus 2030 and Belarus 2031. The initiative group owns securities of these issues totaling $178 million, says a letter addressed to the head of the Belarusian Ministry of Finance.

In total, the total amount of these issues is about $3.25 billion.

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

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

“The default of the Republic of Belarus on the above-mentioned 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 above-mentioned 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 purchased 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 maintain interest and trust in external public borrowings of the Republic of Belarus,” states the appeal addressed to the head of the Ministry of Finance of the Republic.

If Belarus does not repay its obligations, as required by the notice, investors will have the right to file a claim in the London Court of International Arbitration or an arbitration court in Russia, a representative of a group of investors told RBC. According to him, such options are being considered together with lawyers.

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“The statement of default was filed in strict accordance with the rules of law and the issue documentation. Moreover, 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 on the part of Belarus,” says Vladimir Pestrikov, a partner in the dispute resolution practice of Rybalkin, Gortsunyan, Dyakin and Partners (representing investors).

RBC sent a request to the Ministry of Finance of Belarus.

Why do you need a notice of default?

Russian investors have been experiencing difficulties receiving payments on Belarusian Eurobonds since the summer of 2022, after Citibank refused to act as an agent for these securities. At first, the Belarusian side said that it would look for a new agent to resume payments, then it began to conduct them through its own infrastructure, inviting Russian investors to open accounts in Belarus and receive money on them in Belarusian rubles. But only a few investors were able to receive payments under this mechanism and not in full, Sergei Sazonov, head of the “Eurobonds” department of the Association of Bond Owners, previously told RBC. Then Minsk proposed a new payment scheme through the Russian National Settlement Depository (NSD), but also in Belarusian rubles and only to investors who purchased securities before September 6, 2022 (on this day Citibank’s refusal to service securities came into force). According to Sazonov, payments began to arrive at the end of December 2023.

In July 2022, the rating agency Moody's declared default on coupon payments on Belarusian Eurobonds made in Belarusian rubles and downgraded the country's rating to level C (the lowest on the agency's scale). Other international agencies - S&P Global Ratings and Fitch - have suspended their assessment of the credit quality of Belarus. The Russian agency ACRA withdrew the rating of Belarus in November 2023. There was no default on any of the Eurobond issues.

The issuance documentation for Eurobonds of Belarus states that a default can be declared either by the nominal holder of the Eurobonds - the Citivic company, which is part of the Citibank group (the official registrar, financial, payment and transfer agent in relation to Eurobonds), or by the ultimate holders of the Eurobonds, according to comments from private investors for RBC.

“The Ministry of Finance of Belarus does not recognize bonds as default, and this allows the Ministry of Finance not to make immediate payments on the bonds. The bondholder has the right to send a notice of default to the issuer, in which case the issuer will be obliged to immediately repay the debt,” says lawyer Aram Grigoryan, partner of the NSP law firm. By sending a notice, investors do not expect immediate payment from Minsk, but for the purposes of a legal dispute 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 the securities can send a notice of default in case of delay in payments by more than 14 days, notes Roman Kuzmin, lawyer at the Pen & Paper Bar Association. “After such notice is presented, the maturity date of the bond’s par value comes, which is critical for the issuer, since this is always a large amount, for the payment of which funds are generated in advance,” explains the lawyer.

“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. -) can be recognized in various countries of the world and, above all, in the CIS member countries. In the CIS countries, decisions of Russian courts are recognized and executed in a simplified manner in accordance with the Convention on Legal Assistance and Legal Relations in Civil, Family and Criminal Matters,” Pestrikov added.

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

“If Belarus refuses to recognize a default on Eurobonds, then Eurobond holders will be forced to turn to international arbitration (LCIA) or courts to protect their rights and interests and collect debt on Eurobonds from Belarus,” says a commentary from a group of investors.

The possibility of holding proceedings in the London International Court of Arbitration is specified in the issuer's issue documentation. Minsk itself had previously proposed to consider the dispute in this court as part of a trial with another private investor who had not received payments on Eurobonds.

Also, two investors previously applied to Russian courts with a request to recover payments from Minsk. The Moscow City Court stopped considering such an application, citing lack of jurisdiction, and the Arbitration Court of the Kemerovo Region took up such proceedings and issued a ruling to seize payments on Belarusian Eurobonds to a Russian private investor.

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

On the one hand, proceedings in Russia could potentially be more successful for investors, “since Russian courts take a more favorable position towards individuals affected by Western sanctions than foreign courts,” says Kuzmin. But on the other hand, the clause about LCIA contained in the documents suggests that when filing claims in a state court, such statements must be returned, the expert notes.

“Meanwhile, Russian procedural legislation has mechanisms that make it possible to transfer the place of consideration of a 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 claim against Belarus within the framework of international investment arbitration, “since in fact the Republic of Belarus is encroaching on investments in the Belarusian economy made by Russian and foreign investors,” notes Ilya Rachkov, partner at 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. Investors also need to prove that, by refusing payments, Minsk violated their rights, “in particular the right to protection from expropriation; non-payment of Eurobonds is tantamount 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 in this option the consent of Belarus is required), in the International Center for Settlement of Investment Disputes, or in the State Court of Belarus (this option is the least successful for investors), lists expert.