Russia has started to introduce escrow accounts into business

Banks are now opening escrow accounts for legal entities. Initially this settlement method was used in the area of shared construction, but now banks have decided to expand the use of escrow accounts for settlements between companies. This type of account would eliminate upfront payments and bank guarantees. Escrow accounts can be used in different types of transactions, from purchase agreements to M&A transactions.

Banks can also extend credit to escrow account holders to enter into transactions on more favourable terms.

Sberbank has already opened more than 230 escrow accounts worth RUB 12 billion during the trial phase.

Previously, escrow accounts were in great demand to protect the interests of participants of shared construction. Participant’s funds to purchase flats are held in escrow accounts with credit institutions. In this way, the money for flats in new buildings did not flow directly from the buyers to the developers. The developers only get access to the money after the housing complex is commissioned. According to the unified housing information system, more than 90% of housing is purchased using escrow accounts. Loan rates in 2022 did not exceed 4 per cent.

Moscow Credit Bank (MKB) also applies the escrow account mechanism (apart from 214-FZ) for transactions with non-standard terms of escrow and cash disclosure: “We are seeing an increasing trend in the demand for escrow account transactions.” “The use of the tool is relevant in many areas, including in trade finance, the execution of government contracts, and in M&A transactions”, explains Stefan Yasnogorodsky, head of Sovcombank’s corporate and investment real estate business.

However, we cannot yet speak of widespread use of escrow accounts in the corporate sector, as this mechanism will not always be convenient for large and medium-sized businesses. As a rule, in Russian market conditions and economic situation in the country, funds are used during project implementation, but not after its execution. Counterparties have the opportunity to use other means of protection against a partner’s default.

At the same time, using the escrow account mechanism is beneficial to both the bank and the client. The bank bears no risk because it is only an intermediary between the parties to the transaction and gets access to the free balances in the escrow accounts, and the clients in turn get protection in case the counterparty breaches its obligations under the contract.