Russian Federation: New Amendment to the Currency Law

An amendment to the Law "On Currency Regulation and Currency Control" (the "Currency Law"), which came into effect on 15 March 2003, has created a situation with regard to the ability of non-residents to repatriate foreign currency from Russia in a non-cash form.

Previous Version of the Currency Law

Pursuant to the previous version of the Currency Law, non-residents (both individuals and companies) were expressly allowed to transfer out of Russia foreign currency in cash and non-cash form (i) in the amount that has been previously transferred into Russia or (ii) foreign currency that has been legally acquired in Russia.

Amendments

The intention of the amendments was to introduce a simplified regime for non-resident individuals to take cash out of Russia in the amount of up to US$10,000 without the need to prove to the Russian customs authorities that such foreign currency has been previously transferred into Russia. However, when incorporating these amendments into the text of the Currency Law, the general provision allowing non-resident entities to transfer foreign currency out of Russia was deleted.

As a result, the current version of the Currency Law does not contain any provisions expressly allowing non-resident legal entities to transfer foreign currency out of Russia. This amendment also impacts the ability of non-residents to transfer out of Russia foreign currency converted from roubles credited to non-residents’ rouble accounts (eg, dividends).

Although this situation appears to have occurred by mistake, and it was not intended to prohibit non-resident entities from repatriating out of Russia foreign currency acquired in Russia, in our view, the only solution to this problem which would provide full legal comfort, would be to amend the Currency Law.

Position of the Central Bank

We have contacted the Central Bank on an informal basis to clarify the situation. The Central Bank confirmed that, in its view, this was a mistake, and that they were in contact with the Russian parliament. Unfortunately, the Russian parliament has rejected the opportunity to amend the Currency Law to cure the situation due to internal procedural reasons.

However, in order to bring the situation under control and to enable non-resident entities to transfer out of Russia foreign currency acquired in Russia until the new Law on Currency Regulation and Control comes into effect (which has recently been adopted in the first reading by the lower chamber of the Russian parliament), the Central Bank has indicated it will issue a clarification in the next couple of days confirming that such transfers are allowed.

Conclusion

In our view, it is doubtful as to whether the Central Bank has sufficient capacity to issue clarifications in relation to the Currency Law, which is a federal law and, as such, may be officially interpreted only by the parliament. Also, it remains to be seen what form the Central Bank clarification will take.

Therefore, in our view it will be difficult to state that transfers of foreign currency by non-resident entities out of Russia are fully valid until the new Currency Law is adopted.

However, on a practical level, it can be argued that given (i) the silent admission by the parliament and the Central Bank of the mistake and (ii) the promised clarification by the Central Bank, reliance will have to be placed on the Central Bank clarification and those involved in this situation will have to bear the risk until the new Currency Law is adopted. Of course, this will require each Russian authorised bank responsible for making transfers of foreign currency on behalf of non-residents to also take such view.

We will keep you informed of further developments in this area.

Article by John Balsdon, Liza Ivanova and Luke Wells

For more information on this or other Herbert Smith publications, please email us.

© Herbert Smith 2003