RUSSIAN UPDATE: COVID-19: legal risks and recommendations for businesses
CONTRACTS / FORCE MAJEURE
- Is the COVID-19 pandemic (“Pandemic”) a force majeure event? A party may be excused for non-performance under a contract if the non-performance is a direct and immediate result of an event which constitutes an act of God or force majeure. Decrees by the Moscow mayor and regulations issued by heads of other constituencies of Russia consider the Pandemic as such an event. While not binding on the courts, this may serve as circumstantial evidence that the Pandemic qualifies as force majeure. Causation will have to be established. Whether the Pandemic was the direct and immediate cause of the contractual breach and the party should be relieved of the liability for such breach will depend on the facts and will be decided by the courts on a case-by-case basis. Our lawyers would be able to analyse and advise on the Pandemic as force majeure in specific cases.
- Does it discharge the contract completely? Generally, a force majeure event has a temporary effect and does not completely discharge the contract, but merely relieves the non-performing party of the breach in question. When such event ceases to affect the contract, the parties’ obligations resume as normal. However, if a party is physically unable to perform the contract as a result of a force majeure event (often where the subject matter of the contract has been destroyed) or governmental action (e.g. closure of fitness centres), the obligation will be discharged. If the governmental restrictions affecting the contract are later lifted, the discharged contractual obligations will be deemed reinstated.
- Can the affected party terminate or amend the contract? If the Pandemic and related governmental restrictions do not prevent the performance of a contractual obligation, but such performance would materially adversely affect the performing party, the court may discharge or, in exceptionally rare cases, amend the contract on the basis of a material change in circumstances. The circumstances relating to the transaction must have changed to such an extent that if the parties had been reasonably able to foresee them, they would not have entered into the contract, or entered it on materially different terms. Currently, there is little case law which could provide further guidance as to what circumstances would qualify for this rule in specific cases, but such case law may well be generated in light of the Pandemic.
- Can a tenant be excused from paying rent or receive a rent reduction? A recently adopted law provides that tenants are entitled to a reduction in rent if a property cannot be used due to the current lockdown or a state of emergency (which has not yet been declared in Russia). The law does not clarify the amount of such reduction so the application of this provision remains a grey area and disputes can be expected. A tenant may also apply to the court to seek a reduction of rent under a lease on the basis of a material change in circumstances, as mentioned above.
- Can rent payments be deferred? According to the above-mentioned law and a regulation of the Russian government, tenants in industries most affected by the Pandemic are entitled to certain deferrals of rent payments. The lockdown period (currently 4 to 30 April) was declared as non-working days by the President of Russia, and many tenants relied on the general rule that if a payment falls on a non-working day, it must be made on the following working day. However, on 21 April the Supreme Court of Russia issued an opinion that these “non-working” days are not subject to the general rule referred to above and thus do not extend contractual periods for any payment or other obligations unless the tenant proves that there was a force majeure event.
- Deferral of tax and financial reports. The deadlines for filing tax and financial reports that would otherwise be due in March-May 2020 have been extended by three months for all taxpayers (except in respect of VAT). Reports on VAT and social security contributions for the first quarter of 2020 may be filed before 15 May 2020.
- Tax deferral. The deadline for paying taxes that would otherwise have to be paid during the lockdown period has been deferred to 6 May 2020 for all taxpayers other than certain exempt organisations that continue to operate as normal during the lockdown (pharmacies, medical institutions and others). For small and medium-size businesses operating in certain industries most impacted by the Pandemic, taxes have been deferred by up to six months and all organisations in these industries will be able to apply for a longer tax deferral of up to one year in a streamlined process.
- Relaxation of tax and foreign exchange controls. Tax inspections and foreign exchange controls have been suspended until 1 June 2020, and time periods for the provision of requested information to tax authorities have been extended. Overdue and unpaid taxes that would otherwise be payable in the lockdown period will automatically be deferred until the lockdown comprised of non-working days has been lifted.
- General meetings. Annual general meetings of Russian joint-stock companies (JSC) and Russian limited liability companies (LLC) may be held in 2020 later than normal: by 30 September instead of 30 June. JSC (but not LLC) may also hold annual general meetings in 2020 by means of an absentee ballot which is usually prohibited for annual general meetings.
- Maintaining stock quotes. Until the end of the year, JSC may buy back their shares on an exchange without reducing their share capital pursuant to a simplified and expedited procedure provided that their three-month average stock quotes have reduced by 20% or more along with the stock market index. Such buyback should be made through a broker based on public bids.
- Negative net assets. Any company with a second consecutive negative yearly net asset figure on its balance sheet in 2020 will not be required to reduce its share capital or file for liquidation as would normally be the rule.
- Financial reporting. Companies subject to the reporting obligations under the Law on the Stock Market are granted a 90-day extension to disclose their 2019 annual consolidated financial reports and a 120-day extension for their interim consolidated financial reports. Other reporting companies (credit institutions, professional stock market participants, insurance companies and others) will benefit from 60- and 90-day extensions, respectively. Statutory annual accounts for the year 2019 will have to be filed by 12 May 2020. Lists of affiliated persons for the first quarter of 2020 will have to be filed by 7 May 2020.
- Internal audit. The deadline for the implementation of internal audit procedures in public companies has been deferred from 1 July 2020 to 1 January 2021.
- What companies can continue to operate as normal during the lockdown? 4 to 30 April 2020 (the current lockdown period) are non-working days according to a presidential decree. This does not apply to certain organisations that by nature operate on a non-stop basis (e.g. steel manufacturers, oil producers, power plants, water companies, drainage and gas suppliers and others), medical institutions, pharmacies, food and beverage companies, emergency services, key financial institutions and such other organisations as the federal or local governments may designate.
- Payment of salaries during the lockdown. Employers are to pay employee salaries as normal during the lockdown period on a regular working-week basis. Salaries may not be reduced. Remote working may be implemented by signing a supplemental agreement to the employment agreement by email, or the employer issuing an internal regulation to this effect and informing the employees by email or phone. Failure by an employer to pay the salary to an employee remains a criminal offence under the current law.
- Can employers dismiss employees during the lockdown? There is no clear answer to this question right now; future judicial practice may provide further clarity. Under the Russian Labour Code, nothing prevents an employer from dismissing or firing its employees on the grounds available thereunder during the lockdown. However, the Ministry of Labour of Russia takes the view that employees may be dismissed during the lockdown only in the following cases: (i) at the employee’s request; (ii) by agreement of the parties; or (iii) on expiry of fixed-term employment. In other words, the regulator does not seem to allow employers to dismiss employees unilaterally during the lockdown, even due to extraneous circumstances.
- Confidentiality and third-party IP. The shift to remote work due to the Pandemic presents a risk of confidential information leaks from the use of unapproved computers or software as well as a risk of breaching software licences that may only be limited to in-office (and not remote at-home) use, or employees using unlicensed software in their work. Additional confidentiality agreements and policies as well as audit of the employee’s hardware and software and the existing software licences are recommended to mitigate such risks.
- Areas of focus. The Federal Antimonopoly Service of Russia (FAS) is currently particularly focused on supervision of the pharmaceutical, medical products, food, oil and IT industries which are of key importance during the Pandemic. Drug and dietary supplement manufacturers have been fined for providing misleading information to consumers about the effect of their products on COVID-19.
- Anti-monopoly practices. The FAS has confirmed retailers may lower prices on key welfare products to a minimum of the cost price during the Pandemic. It has not formulated its official position on whether agreements between competitors and coordinated actions aimed at meeting the demand for certain products would be allowed during the Pandemic (as is the case in some other countries) although the regulator appears to be ready to review such applications promptly. Any flexibility regarding coordinated actions will not apply to arrangements to raise prices on welfare or medical products of particular importance during the Pandemic.
- Does FAS operate as normal? The FAS continues to consider anti-monopoly cases, primarily remotely by means of video conference. If remote consideration is not possible, the case may be stayed for up to nine months in accordance with the law. Applications for merger clearance are currently only accepted in electronic form and processing times may be delayed. The FAS has also cancelled all routine inspections of companies and entrepreneurs originally scheduled for this year.
- Are pharmaceutical prices regulated during the Pandemic? The government has the power to set maximum wholesale and retail prices for certain drugs and medical products during the Pandemic if the market prices for such products rise by more than 30% over a 30-day period.
- Can COVID-19 tests be imported to Russia? COVID-19 tests still have to be registered to be imported and sold in Russia but the registration process has been simplified, takes up to six working days and once registered, the test can be imported in any amount.
- Are Pandemic related products regulated? In accordance with a government regulation of 3 April, medical masks, respirators, medical gloves and certain other products could only be distributed by certain licensed operators at fixed maximum prices. However, on 14 April that regulation was suspended until further notice.
- Will private clinics have to treat COVID-19 patients? According to a presidential directive, all medical institutions, however organised and whether privately or publicly held, must carry out stocktaking and assess their readiness to provide medical assistance to COVID-19 patients.
- Debt moratorium. A debt moratorium was introduced in Russia on 6 April 2020 in respect of companies and entrepreneurs most impacted by the Pandemic, which includes companies operating in air travel, transportation, recreation, sports, tourism, hospitality, restaurant, further education, dentistry, cinema and other industries, as well as systemically important and strategic organisations (Protected Businesses). The moratorium prohibits creditors from filing for insolvency of the Protected Businesses and suspends the obligation for the Protected Businesses to file for their own insolvency. Default interest and other financial penalties cease to apply and any recourse to the assets of the Protected Businesses, including any collateral, is prohibited (although disposals of assets made with a view to evading creditors remain voidable under the general rule). The moratorium will last six months and may be extended but does not affect insolvency proceedings commenced before its introduction. During the moratorium, the Protected Businesses may not distribute dividends and their owners may not sell shares in such companies. Within three months after the moratorium, the Protected Business may enter into a simplified creditor arrangement to restructure its debts if the majority of the voting creditors agree to it. It would be prudent for the businesses concerned to start negotiating such arrangements with creditors while the moratorium lasts. On 17 April, the State Duma of Russia approved amendments allowing any company to be voluntarily excluded from the moratorium list. These amendments are expected to be signed into law by the Russian President in the coming days.
- The Russian borders remain open for imported goods and their transit, but international transit of goods has been made subject to certain time and route restrictions in neighbouring countries. Some of the border checkpoints have changed their working hours, and thus crossing the border through them may take longer. A “green corridor” has been implemented for goods identified as essential by the Government of Russia. Customs duties are suspended on a number of products connected with fighting the Pandemic and certain foods. VAT will not apply to certain imported medical products. For duty and VAT exemptions to apply, certificates from responsible state authorities may be required.
- Export of medical products that can be used against COVID-19 (masks, respirators, goggles, etc.) is prohibited (other than for personal use or as humanitarian aid to other states). A similar prohibition applies to certain food products. Quotas have been introduced on the export of key cereals and vegetables.
- Do construction companies continue to operate during the lockdown? There is no clarity on how the lockdown will apply to construction companies in general. Local governments adopt different regulations depending on types of construction companies, projects they perform and, of course, the general epidemic situation. Currently, construction works are suspended in Moscow and Moscow Oblast until 1 May but continue as normal in most other regions of Russia.
- Can construction companies be excused for delays caused by the Pandemic? The Pandemic is generally considered a force majeure event and delays may be excused. This will be assessed on a contractual basis (see Contracts above).
- Mortgage payments. Under the Russian Civil Code, a mortgage payment falling on a non-working day is due on the following working day, so technically, failure to make mortgage payments during the lockdown will not constitute a default. However, the Central Bank has announced that during the lockdown, financial obligations must be performed by the debtors as normal. On 21 April this position was officially upheld by the Supreme Court of Russia. Hence any such non-payment may be treated by the banks as a default and should be discussed with the bank in advance to avoid potential foreclosure.
ADMINISTRATIVE AND CRIMINAL OFFENCES
- New liability in light of Pandemic. In light of the Pandemic, amendments have been introduced to the Russian Administrative and Criminal Codes to increase punishment for breach of sanitary, hygiene and anti-epidemic rules and regulations, as well as lockdown rules during the quarantine or state of emergency or where there is a risk of dangerous mass infection. Such rules and regulations are mainly contained in local government regulations and decrees of chief sanitary inspectors of the regions and have been supplemented as a result of the Pandemic.
- Administrative offences. Breach of the above-mentioned rules and regulations (which, as noted above, are not uniform and are found in local acts) during the Pandemic may attract a fine of up to RUB 300,000 for individuals, RUB 500,000 (or disqualification for up to three years) for company officers and RUB 1,000,000 or suspension of operations for up to 90 days for companies and entrepreneurs.
- Criminal offences. Acts or omissions that constitute a breach of sanitary or anti-epidemic rules and cause mass infection or food poisoning are criminal offences punishable by a fine of up to RUB 700,000 or prison sentence of up to two years and those that lead to human death — by a fine of up to RUB 2,000,000 or prison sentence of up to seven years. This will mainly apply to managers of organisations subject to the relevant rules.
- Certain foreign exchange controls and tax offences have been relaxed for businesses. A new measure of initial warning has been introduced for minor offences. Thresholds for currency control offences have been increased several times and tenfold in some cases. A person has to be found guilty of an administrative offence under the currency control rules before he can be held criminally liable (save for the most serious criminal offences). Further, it has become harder to hold owners and managers of a business liable for offences committed by a group of people acting in conspiracy, which could result in business property being confiscated and the individuals involved being placed under arrest for up to 18 months. The prosecutors will now have to prove the business was initially set up with a view to committing such a group offence rather than base the case on individual actions and organisation features of the business.