Bank of Russia expands incentive-based banking regulation for technological sovereignty and structural economic adaptation projects

On 14 October 2024, the Bank of Russia Board of Directors extended the conditions for applying risk-oriented incentive-based regulation to technological sovereignty and the structural adaptation of the economy (TS and SAE) projects.

Given the importance of TS and SAE projects for the sustainable development of the economy, the regulator permits banks to:

• apply incentive-based regulation to projects launched prior to 30 September 2022 provided that less than 15% of the project budget was spent by 1 October 2022 (previously, it could only be applied to projects launched after 30 September 2022);
• apply incentive-based regulation to the refinancing of other banks’ loans that meet TS and SAE criteria (previously, no refinancing incentives were provided);
• make no requirement for investors to invest equity in projects that meet the eligibility criteria for project financing of high and highest quality (earlier, investors were obliged to contribute at least 20%);
• apply incentive-based regulation for up to ten years from the date the bank issues its first loan for a project implemented under a concession agreement (for other projects, the maximum period of application of the incentive remains seven years).

These measures are intended to boost banks’ potential to finance important projects and encourage risk sharing among banks for large-scale projects.

In addition, given the low risk and high economic importance of certain large TS and SAE projects implemented under concession agreements, the Bank of Russia additionally eased the criteria for applying incentive-based regulation:

• banks are permitted to apply a lower risk weight of 65% to high-quality projects if banks use the finalised approach to calculate capital adequacy ratios, which corresponds to the risk weight of reliable and transparent companies (investment-grade companies);
• banks are permitted to regard the credit quality of such projects as the highest if it is classified as quality category I.

These provisions may be applicable only to those concession agreements that simultaneously meet all the following criteria:

• the grantor of the concession is the Russian Federation;
• the concession agreement obliges the grantor to pay interest and fully repay the principal to the bank if the concession agreement is terminated;
• the lending bank has the right to initiate the termination of the agreement if the concessionaire fails to duly perform its obligations to the bank.

In the future, the Bank of Russia plans to draft special regulations for concession agreements to stipulate risk mitigation factors for all concessions in addition to TS and SAE projects.