Promissory Note Settlements: Russian and International Experience

 

February 16, 2026

BRACE Law Firm ©

 

In conditions of financial instability, the risk of non-payment or late payment for goods, works, and services increases. To mitigate these risks, suppliers, including those engaged in foreign trade, may require advance payment, settle through letters of credit issued by the buyer, or utilize promissory note settlements.

However, letter of credit settlements and advance payments involve using the buyer's funds before the supplier transfers ownership of products or services, which diverts liquidity from turnover.

Currently, the use of promissory notes in international settlements is significantly less frequent than in the past. Their prevalence is substantially lower than that of bank transfers and letters of credit. The promissory note remains a tool for payment deferral, trade finance, and securing obligations between counterparties, although digitalization and associated risks have reduced their popularity. Consequently, the promissory note form of settlement warrants detailed consideration.

Regulation of Promissory Notes in Russian and International Law

The primary regulatory act governing promissory note circulation in Russia today is Federal Law No. 48-FZ dated March 11, 1997, On the Promissory Note and the Bill of Exchange (the "Law on Promissory Notes and Bills of Exchange").

Law No. 48-FZ consists of only eight articles, which refer to other laws and regulations. Specifically, Article 1 confirms that Resolution of the Central Executive Committee and the Council of People’s Commissars of the USSR No. 104/1341 dated August 7, 1937, On the Enactment of the Regulations on the Bill of Exchange and the Promissory Note (the "Resolution No. 104/1341"), applies within Russia.

Article 2 establishes that Russia, its constituent entities, urban and rural settlements, and other municipalities may only bind themselves under bills of exchange and promissory notes in cases specifically provided for by federal law.

Pursuant to Article 3, interest and penalties specified in Articles 48 and 49 of Regulations No. 104/1341 are paid at the key rate established by the Bank of Russia according to the rules set forth in Article 395 of the Civil Code of the Russian Federation (the "Civil Code").

According to Article 4, promissory notes must be drawn up only in hard copy. Article 5 establishes that for claims based on a protest of a note for non-payment, non-acceptance, or non-dating of acceptance performed by a notary against a physical person, legal entity, or individual entrepreneur, a court order is issued and execution proceeds under procedural law.

Furthermore, as the legal successor to the USSR, Russia is a party to several Geneva Conventions, including:

• On the Stamp Laws in Connection with Bills of Exchange and Promissory Notes (effective for the USSR since November 25, 1936);
• Providing a Uniform Law for Bills of Exchange and Promissory Notes (effective for the USSR since February 23, 1937);
• For the Settlement of Certain Conflicts of Laws in Connection with Bills of Exchange and Promissory Notes (entered into force for the USSR on February 23, 1937).

The latter convention was implemented into Soviet, and subsequently Russian, legislation through the adoption of Resolution No. 104/1341.

Concept and Types of Promissory Notes

A promissory note is a security (Article 143 of the Civil Code). A security is a document certifying property rights, the exercise or transfer of which is possible only upon its presentation, subject to compliance with the established form and mandatory requisites. All rights certified by a security transfer upon its delivery.

A promissory note has a dual nature. On one hand, it is a security certifying a property right. On the other, it certifies an unconditional obligation of the maker (promissory note) or another designated drawee (bill of exchange) to pay a specific sum of money upon the arrival of the term specified therein.

Russian citizens and legal entities have the right to bind themselves under bills of exchange and promissory notes. These instruments must be executed only on paper (hard copy).

Differences Between Promissory Notes and Bills of Exchange

A promissory note is a direct promise by the debtor (maker) to pay a sum to the creditor, involving two parties (the maker and the holder).

A bill of exchange (draft) is an order from the drawer to a third party (the drawer's debtor) to pay the creditor. At least three parties participate in a bill of exchange: the drawer, the drawee, and the holder. The drawee becomes the primary debtor only after acceptance (agreement to pay).

A bill of exchange must contain:

• the term "bill of exchange", included in the text of the document and expressed in the language in which the document is drawn up;
• a simple and unconditional order to pay a specific sum;
• the name of the person who must pay (the drawee);
• an indication of the maturity date;
• an indication of the place where payment must be made;
• the name of the person to whom or to whose order payment must be made;
• an indication of the date and place where the bill is issued;
• the signature of the person issuing the bill (the drawer).

A document missing any of these designations does not have the force of a bill of exchange, except in the following cases:

• a bill of exchange with no indicated maturity is considered payable at sight;
• in the absence of a specific indication, the place designated beside the name of the drawee is considered the place of payment and the residence of the drawee;
• a bill of exchange that does not indicate the place of issuance is recognized as signed in the place designated beside the name of the drawer.

A promissory note must contain the following requisites:

• the term "promissory note", included in the text and expressed in the language in which the document is drawn up;
• a simple and unconditional promise to pay a specific sum;
• an indication of the maturity date;
• an indication of the place where payment must be made;
• the name of the person to whom or to whose order payment must be made;
• an indication of the date and place where the note is issued;
• the signature of the person issuing the document (the maker).

A document missing any of these requisites does not have the force of a promissory note. A promissory note with no indicated maturity is considered payable at sight. In the absence of a specific indication, the place of issuance is considered the place of payment and the residence of the maker. A promissory note not indicating the place of issuance is considered signed in the place designated beside the name of the maker.

Provisions relating to bills of exchange apply to promissory notes insofar as they are not incompatible with the nature of the instrument.

The essence of a promissory note obligation is that the amount specified in the note (the face value) is subject to payment, rather than the amount due under the transaction for which the note was issued or transferred.

The absence of a chief accountant's signature on a note signed or endorsed on behalf of a legal entity does not invalidate the note".[1] However, if a note lacks the handwritten signature of the maker, it is recognized as executed in violation of the required form".[2]

Payment by Promissory Note in International Commercial Transactions

Under sanctions, international payments in foreign trade have become significantly more complex. A promissory note can serve as a settlement tool with foreign partners.

In international trade, the bill of exchange is used most frequently. A bill of exchange (draft) is the primary instrument of international settlements, representing a written order from the exporter (drawer) to the importer (drawee) to pay the specified amount to a third party (payee) within a set timeframe. It provides for deferred payment, is used in documentary letters of credit, and requires mandatory acceptance by the buyer.

The advantages of using a promissory note as a settlement method under sanctions include:

• Absence of direct currency transfer. The note allows parties to bypass currency restrictions because it does not constitute a movement of funds in itself, but rather an obligation to pay in the future;
• Fixing the payment amount and terms, which provides convenience in conditions of volatile exchange rates;
• Bypassing banking system restrictions, as promissory note settlements in international transfers do not utilize the classic banking chain; therefore, sanctions and SWIFT restrictions do not affect this instrument;
• Ability to choose currencies, as a note can be issued with a link to any currency (by agreement), allowing for settlements in a currency convenient for both parties and reducing currency risks".

Note that using promissory notes in cross-border settlements involves several risks and limitations:

• The possibility that the delivery of goods may not occur after payment by note. To mitigate this risk, parties should carefully plan settlement dates, such as agreeing to pay only after confirmation of delivery or after the planned delivery date;
• Using promissory notes may raise questions from tax authorities, particularly during VAT recovery attempts;
• Legal difficulties abroad. Requests for legalization and recognition of a note may result in additional costs or create insurmountable barriers to settlement;
• Fraud and falsification. Because a note is a paper (or electronic) debt obligation, there is a risk of forgery or the use of fraudulent schemes;
• Risk of late redemption or impossibility of redemption, for example, in the event of the issuer's bankruptcy;
• The need for careful counterparty selection. Since a significant portion of risks relates to counterparty actions, companies must conduct thorough due diligence on business reputations and legal reviews of documents before concluding transactions". [4]

Thus, before using promissory notes in foreign trade, it is essential to evaluate the associated risks and limitations in detail and provide for the protection of interests in the international contract.

Circulation and Endorsement

A promissory note may be transferred via endorsement, which must be simple and unconditional. Any condition limiting the endorsement is deemed unwritten. A partial endorsement is invalid. The endorsement must be written on the note itself or on an attached sheet (allonge). It must be signed by the endorser. An endorsement might not specify the person in whose favor it is made or may consist solely of the endorser's signature (blank endorsement). In the latter case, to be valid, the endorsement must be written on the back of the bill of exchange or on the allonge.

An endorsement transfers all rights arising from the bill of exchange. If the endorsement is in blank, the holder may:

• fill the blank with their own name or the name of another person;
• re-endorse the note in blank or to another person;
• transfer the note to a third party without filling the blank and without making an endorsement.

Unless otherwise stipulated, the endorser is liable for acceptance and payment. The endorser may prohibit a new endorsement; in this case, they are not liable to persons in whose favor the note was subsequently endorsed. The person in possession of the note is recognized as the lawful holder if they base their right on an uninterrupted series of endorsements, even if the last endorsement is in blank. Cancelled endorsements are considered invalid.

A promissory note may be issued with the following maturity:

• at sight;
• at a fixed period after sight;
• at a fixed period after date;
• on a specific day.

Notes containing either another maturity designation or consecutive payment terms are invalid.

In a note payable at sight or at a fixed period after sight, the drawer may stipulate that interest will accrue on the face value. In other bills of exchange, such a condition is deemed unwritten. The interest rate must be specified in the note; if missing, the condition is deemed unwritten. Interest accrues from the date the bill is issued unless another date is specified.

It should be noted that if the amount of a bill of exchange is indicated in both words and figures, in the event of a discrepancy, the note is valid for the amount expressed in words. If the amount is indicated multiple times, the note is valid only for the smaller amount.

The drawer is liable for acceptance and payment. The drawer may exempt themselves from liability for acceptance. A condition by which the drawer exempts themselves from liability for payment is considered invalid.

A note payable at sight is paid upon presentation. It must be presented for payment within one year of its issuance. The drawer may shorten this period or stipulate a longer one. Endorsers may shorten these terms. The drawer may stipulate that a bill of exchange payable at sight cannot be presented for payment before a certain date. In such a case, the presentation period runs from that date.

The maturity date for a note issued for one or several months from issuance or sight falls on the corresponding day of the month in which payment must be made. If that month lacks a corresponding day, the maturity date is the last day of that month. If a note is issued for one and a half months or several months and a half, whole months are counted first. If the maturity is set for the beginning, middle, or end of a month, these expressions mean the first, fifteenth, or last day of the month. The phrases "8 days" or "15 days" mean a full eight or fifteen days, not one or two weeks. The expression "half a month" means 15 days.

The holder of a note maturing on a specific day or at a fixed period from issuance or sight must present the bill for payment either on the day it must be paid or on one of the two following business days.

Upon payment, the drawee may require the holder to deliver the note with a receipt for payment. The holder cannot refuse partial payment. In the case of partial payment, the drawee may require a notation of such payment on the note and the issuance of a receipt.

The holder cannot be compelled to accept payment on a bill of exchange before its maturity. A drawee who pays before maturity does so at their own risk.

A party who pays at maturity is released from the obligation unless there was fraud or gross negligence on their part. The payor must verify the correctness of the sequence of endorsements but not the signatures of the endorsers.

Payment on a note maturing on a statutory non-business day may be demanded only on the first following business day. All other actions relating to a bill of exchange, specifically presentation for acceptance and protest, may only be performed on a business day. If any action must be performed within a set period whose last day is a statutory non-business day, the period is extended to the next business day. Non-business days occurring during the period are included in the count.

The day from which a period begins to run is not included in the terms established by law or the note. No "days of grace", whether statutory, contractual, or judicial, are allowed.

If a note is drawn in a currency that does not circulate at the place of payment, the amount may be paid in local currency at the exchange rate on the maturity date. If the debtor defaults, the holder may, at their discretion, demand payment in local currency at the rate either on the maturity date or the payment date. This rule does not apply if the drawer stipulated that payment must be made in a specific currency indicated in the note (an effective payment clause in a foreign currency).

Please note that if a note is not presented for payment within the established period, every debtor has the right to deposit the amount of the note with a competent authority at the expense and risk of the holder.

In addition to the original, a note may be issued in several identical counterparts. These counterparts must be numbered in the text; otherwise, each is considered a separate bill of exchange. If a note does not state it was issued as a single copy, the holder may demand several counterparts at their own expense. To do so, the holder must contact their immediate endorser, who is obliged to assist with their own endorser, and so on, up to the drawer. Endorsers must reproduce the endorsements on the new counterparts.

Payment made on one counterpart releases the parties from liability, even if not stipulated that such payment cancels the other copies. However, the drawee remains liable for each copy they accepted and did not have returned. An endorser who transferred counterparts to different persons, as well as subsequent endorsers, are liable on all counterparts bearing their signature that were not returned. Anyone who sends one copy for acceptance must indicate on the other copies the name of the person in whose hands that copy is held.

Every holder of a note has the right to make copies. A copy must exactly reproduce the original with endorsements and all other marks. It must indicate where it ends. It may be endorsed and guaranteed (avalized) in the same manner and with the same consequences as the original. The copy must specify the person holding the original document, who is obliged to deliver said document to the lawful holder of the copy.

If the original document, after the last endorsement made before the copy was taken, contains the clause: "from here on, endorsement is valid only on the copy" or any other equivalent formula, an endorsement placed thereafter on the original is invalid.

In the event of an alteration to the text of a bill of exchange, persons who signed after the alteration are liable according to the altered text; persons who signed before are liable according to the original text.

Taxation in Promissory Note Settlements

The fact of receiving an own promissory note from a buyer (customer) as payment for realized goods (works, services) does not affect the supplier (contractor), as VAT on the value of these items is already calculated on the date of shipment and is not subject to further adjustment (Articles 154 and 167 of the Tax Code of the Russian Federation (the "Tax Code")).

In cases where the amount of interest income (discount) actually received on a note exceeds the interest calculated based on the Bank of Russia's refinancing rates effective during the relevant periods, the excess must be included in the VAT tax base (Article 162 of the Tax Code). The taxpayer should issue a single copy of a VAT invoice for the corresponding amount (Clause 18 of the Rules for Maintaining the Sales Ledger approved by Government Decree No. 1137 dated December 26, 2011).

Since a note received from a buyer (customer) is an obligation to pay a specific sum by a set date, receiving such a note before the shipment of goods (works, services) does not constitute a non-monetary advance payment.

In this case, the obligation to pay VAT arises if, in the period preceding shipment, the buyer (customer) redeems the note or the supplier (contractor) transfers it to a third party (Article 167 of the Tax Code).

For the supplier (contractor), the buyer's (customer's) own note is property (Articles 128 and 143 of the Civil Code). Upon receiving such a note, the buyer's obligation to pay for goods (works, services) is terminated (Articles 408 and 414 of the Civil Code). Simultaneously, promissory note relations arise between the parties, and tax authorities will qualify the issuance of a note as payment in non-monetary form.

Receiving a buyer's note as payment for goods (works, services) does not trigger profit tax consequences for the supplier (contractor) because revenue (excluding VAT) is determined on the date of realization. The fact of payment is irrelevant (Articles 248, 249, and 271 of the Tax Code). Interest (discount) on the note is recorded by the holder as non-operating income (Articles 43 and 250 of the Tax Code).

Receiving a buyer's note before shipment does not constitute a non-monetary advance. A prepayment occurs only if the buyer pays the note before shipment or if the supplier transfers it to a third party.

Receiving a third-party note before the shipment of goods (works, services) is qualified as a non-monetary prepayment. Therefore, the supplier must calculate VAT from the prepayment (based on the contract value) (Article 167 of the Tax Code) and issue a VAT invoice within five calendar days of receiving the prepayment". [4]

The supplier is entitled not to issue a VAT invoice if the following conditions are met simultaneously (Article 169 of the Tax Code):

• the buyer is not a VAT taxpayer or is exempt from VAT obligations;
• there is written consent from the parties not to issue VAT invoices.

On the shipment date, the supplier's obligation to determine the VAT tax base arises again under Article 154 of the Tax Code, along with the right to deduct the VAT amount previously calculated from the advance (Articles 167, 171, and 172 of the Tax Code). If a note is received for goods (works, services) exempt from VAT, the corresponding prepayment is not included in the tax base.

The transfer of ownership of a third-party note, including in exchange for goods (works, services), is recognized as a realization of the note, which is exempt from VAT". [5]

Regarding profit tax, when receiving a third-party note as payment under the accrual method, revenue (excluding VAT) is recognized on the date of realization. Payment status is irrelevant; thus, receiving a third-party note has no impact on a supplier using this method. The note is recorded for tax purposes at a value equal to the debt being settled (including VAT) for the realized goods (works, services).

Interest (discount) on the note is included in the holder's non-operating income". [6] Under the accrual method, such income is recognized monthly on the last day of the current month and on the date the note is presented for redemption.

Receiving a third-party note before shipment is equated to a non-monetary prepayment. The advance amount is determined as the contract value of the goods (works, services). For a seller using the accrual method, this fact has no consequences, as prepayment amounts are not considered for taxation purposes (Article 251 of the Tax Code).

Liability and Litigation Concerning Promissory Notes

A holder may file a lawsuit against endorsers, the drawer, and other obligated parties upon maturity if payment was not made, or before maturity:

• if there was a total or partial refusal of acceptance;
• in the event of the drawee's insolvency, regardless of whether they accepted the note, if they have suspended payments (even if not established by a court), or if an execution against their property proved fruitless;
• in the event of the drawer's insolvency on a note not subject to acceptance.

Refusal of acceptance or payment must be certified by a formal act — a notary's protest. The state duty for protesting a note for non-payment, non-acceptance, or non-dating, or for certifying non-payment of a check, is 1% of the unpaid amount, but no more than 20,000 rubles (Article 333.24 of the Tax Code).

All persons who issued, accepted, endorsed, or guaranteed (avalized) a bill of exchange are jointly and severally liable to the holder. The holder has the right to sue all these persons individually or collectively, without being required to follow the order in which they became bound. The same right belongs to any signer who has paid the note. A lawsuit against one obligated party does not prevent lawsuits against others, even if they became bound after the original defendant.

The holder may claim from the party they are suing (Clause 48):

• the unaccepted or unpaid amount of the note, plus interest if stipulated;
• interest at 6% from the maturity date;
• costs of the protest, notices, and other expenses;
• a penalty of 3% from the maturity date.

A party who has paid the note may claim from those liable to them:

• the entire amount paid;
• interest on said amount at 6% from the date of payment;
• incurred expenses.

In Case No. A41-85440/2023, the plaintiff, holding four notes, sued to recover the debt. The courts found that "all four notes correspond in form and content to the requirements of the Regulations on the Bill of Exchange and the Promissory Note, have no defects rendering them invalid as securities, and the originals were inspected by the first-instance court and are stored according to established procedure". In granting the claims, the courts noted that the plaintiff is the holder of notes issued by the defendant, no grounds for refusing payment were proven, and the calculations of interest and penalties were verified and found correct". [7]

Under Article 3 of the Law on Promissory Notes and Bills of Exchange, for a note presented and due for payment, the interest and penalties specified in Articles 48 and 49 of the Regulations on the Bill of Exchange and the Promissory Note are paid at the key rate established by the Central Bank of the Russian Federation according to Article 395 of the Civil Code.

In Case No. A07-2167/2021, the plaintiff calculated the debt for unpaid notes under Article 395 of the Civil Code. The defendant moved to apply Article 333 of the Civil Code.

Based on Article 333 of the Civil Code, if the penalty due is clearly disproportionate to the consequences of the breach, the court may reduce it. After considering the defendant's request, the courts concluded that "it was not proven that the penalty claimed by the plaintiff is clearly disproportionate to the breach, as the penalty was calculated at the key refinancing rate, which is a minimal rate. The courts considered the period of default on the principal obligation and the interest obligation". [8]

A holder may demand interest on the face value from the defendant, which accrues from the day following the maturity date until the day the holder receives payment, regardless of whether a prior court decision for recovery was issued". [9]

During the consideration of promissory note enforcement cases, the court verifies whether the document meets the formal requirements allowing it to be treated as a security (promissory note)". [10]

In Case No. A40-81880/2018, the court found that the notes presented by the plaintiff had a formal defect and correctly dismissed the claim. "A holder's claim for enforcement based on a document that does not meet form and requisite requirements shall be rejected by the court". [11]

In enforcement claims, the plaintiff must present the original document to the court, as the exercise of rights certified by a security is possible only upon its presentation (Clause 1, Article 142 of the Civil Code).

In Case No. A40-155712/2018, the courts dismissed the claims, noting that "the original notes were not delivered by the applicant to the debtor for payment, were not presented to the court, and are not in the applicant's possession; there are no legal grounds to establish the debt". [12]

Resolution No. 104/1341 specifies that the holder loses rights against endorsers, the drawer, and other obligated parties (except the acceptor) after the expiration of the terms established:

• for presenting a note payable at sight or at a fixed period from sight;
• for performing a protest for non-acceptance or non-payment.

Failure to present a note for acceptance within the period stipulated by the drawer results in the holder losing rights arising from both non-payment and non-acceptance, unless the drawer only intended to exempt themselves from liability for acceptance. If the presentation period is stipulated in an endorsement, only the endorser may invoke it.

Lawsuits against the acceptor arising from a note are barred after three years from maturity. Holder claims against endorsers and the drawer are barred after one year from the date of a timely protest or from the maturity date if an "expense-free" clause was used. Endorser claims against each other and the drawer are barred after six months from the date the endorser paid the note or was sued.

The impossibility of recognizing a document as a promissory note due to a formal defect does not prevent a separate claim based on general civil law principles regarding ordinary debt documents". [13]

In summary, a promissory note is a security representing an unconditional obligation of the maker to pay a specific sum to the holder at an agreed time. Promissory notes serve as settlement instruments. Their advantages include liquidity, reliability, ease of use, and guaranteed payment. In foreign trade, they can be used for international settlements when standard bank transfers are delayed or blocked, though their use in cross-border transactions carries specific risks.

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References

[1] Resolution of the Plenum of the Supreme Court of the Russian Federation No. 33, Plenum of the Supreme Arbitration Court of the Russian Federation No. 14 dated December 4, 2000, On Certain Issues of the Practice of Resolving Disputes Related to the Circulation of Promissory Notes.

[2] Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 18 dated July 25, 1997, Review of the Practice of Resolving Disputes Related to the Use of Promissory Notes in Economic Turnover.

[3] Ibid.

[4] Letter of the Ministry of Finance of the Russian Federation No. 03-07-15/39 dated March 6, 2009, On the Application of Tax Deductions for Advance Payments.

[5] Letter of the Ministry of Finance of the Russian Federation No. 03-02-07/1-79 dated March 21, 2011.

[6] Letter of the Ministry of Finance of the Russian Federation No. 03-03-06/1/1128 dated January 16, 2017.

[7] Resolution of the Arbitration Court of the Moscow District dated November 6, 2024, in Case No. A41-85440/2023.

[8] Resolution of the Arbitration Court of the Urals District dated December 23, 2021, in Case No. A07-2167/2021.

[9] Resolution of the Plenum of the Supreme Court of the Russian Federation No. 33, Plenum of the Supreme Arbitration Court of the Russian Federation No. 14 dated December 4, 2000, On Certain Issues of the Practice of Resolving Disputes Related to the Circulation of Promissory Notes.

[10] Ibid.

[11] Resolution of the Arbitration Court of the Moscow District No. A40-81880/2018 dated June 4, 2019.

[12] Resolution of the Arbitration Court of the Moscow District dated April 30, 2019, in Case No. A40-155712/2018.

[13] Information Letter of the Presidium of the Supreme Arbitration Court of the Russian Federation No. 18 dated July 25, 1997, Review of the Practice of Resolving Disputes Related to the Use of Promissory Notes in Economic Turnover.