INTRODUCTION
2. Regulation 39 clarifies and amends to a certain extent the application of the Law "On Currency Regulation and Currency Control" of 9 October 1992, which limits foreign currency payments between residents of the Russian Federation and non-residents. 'Current transactions' can be carried out without any limitation, whereas 'transactions connected with the movement of capital' generally require prior approval of the Central Bank. Residents are defined as Russian enterprises or individuals living permanently in Russia, whereas non-residents are foreign enterprises, including branches or representative offices located in Russia and individuals permanently residing outside Russia.
3. Previously, all transactions connected with the movement of capital were subject to prior approval by the Central Bank of Russia. This affected in particular payment obligations outstanding longer than 180 days. Regulation 39 lists a number of exemptions from this requirement. If a transaction does not appear in the list and cannot be classified as a 'current transaction', approval of the Central Bank still generally has to be obtained for each transaction.
REPORTING REQUIREMENTS
4. If one of the exemptions listed in Regulation 39 applies, this has to be explicitly mentioned in the bank transfer order and 'individuals and legal entities' should provide banks with all documents which entitle them to such exemption. Banks are instructed to keep a record of such payments and to submit quarterly a report of all 'currency operations' to the Central Bank. The reporting obligation includes all foreign currency payments. Banks are likely to start becoming more restrictive in requiring Central Bank approval in cases where an exemption does not apply, or in unclear cases, as severe penalties are imposed for non, late or incorrect informing the Central Bank of currency operations. Banks face confiscation of the full amount of each transaction not properly reported by them.
IMPORT- EXPORT OPERATIONS
5. The new regulation particularly affects some types of foreign trade operations and also cases where goods and equipment are received by a Russian enterprise from abroad without being paid for within 180 days, and the general treatment of such transactions can be summarised as follows:
- payment by Russian residents for imported goods, as well for works and services performed for Russian residents by non-residents, can now be deferred for over 180 days, with the exception of payments for the import of aircraft, sea and river vessels and spacecraft. This particularly affects supplier credit for a Russian enterprise receiving goods and equipment from abroad on an ongoing basis with payment outstanding longer than 180 days. Advance payments by Russian residents for imported goods and works or services are, as before, subject to the 180 day limitation;
- advance payments received by Russian residents for goods to be exported or for services can now be paid without limitation. Once goods are cleared through customs for export or services have been performed for non-residents, the payment has to be made within 180 days.
INTERCOMPANY LOANS
6. The regulation explicitly states that currency loans outstanding longer than 180 days are not subject to prior Central Bank approval provided they are issued by 'authorised banks'. This means that currency loans made by other lenders require a Central Bank licence. This represents no change as compared to the old regime and means that intercompany loans still have to be routed through a bank registered in Russia, i.e. as a 'back-to-back bank loan'. It is also not yet clear whether 'authorised banks' will include foreign banks and credit institutions.
"OFF-SHORE" PAYMENTS
7. The new regulation confirms that foreign currency payments from non-residents to residents are not subject to Central Bank approval if the payment is credited to a foreign currency bank account with a Russian bank. This implies that, without Central Bank approval, payments made "off-shore" to Russian enterprises or individuals are in violation of the currency law, although there is no system in place to enforce this.
TRANSACTIONS NOT SUBJECT TO PRIOR APPROVAL
8. The regulation reconfirms some general principles regarding the application of the 180 day rule. The regulation contains a list of transactions which generally bear the character of an ongoing supply of goods or services, payment for which is not subject to Central Bank approval. It is not clear whether Central Bank approval should have been obtained (or still has to be obtained) for such transactions in the past. As the regulation does not contain transitional provisions for past transactions, it is likely that the regulation confirms the absence of a requirement for Central Bank approval rather than amending the regime that existed in the past. Payments not subject to Central Bank approval include:
- payment of insurance premiums of any kind by residents;
- receipt by residents of insurance payments;
- lease payments by residents for aircraft and ships located outside the Russian Federation (and also spacecraft) and for any other movable property located outside Russia (except payments for the 'lease' of funds, securities or other debt obligations) on the condition that such property is physically transferred to the lessee within 180 days after the first lease payment has been made;
- payment by residents of membership fees for non-resident, non-governmental international organisations;
- payments by residents to non-residents for international seminars, conferences, expositions, sport or other cultural events taking place outside Russia;
- receipt by residents from non-residents of payments for such events taking place inside Russia;
- receipt by residents which are non-commercial organisations of charitable donations from non-residents;
- payment by residents to non-residents for medical treatment or education of individuals. An entity or individual which did not receive the treatment or education may make such payments;
- payments by residents to non-residents for subscriptions to foreign periodic publications;
- payments by residents out of Russia of pensions, alimony, amounts paid to foreign states, stamp duties, or payments on the basis of court decisions, in accordance with the legislation of foreign states. This includes payment of taxes to foreign states. The same rule applies to reverse transfers to Russia by non-residents. Banks will no longer require Central Bank permission for payment of taxes abroad;
- purchase or sale through authorised banks (by residents and non-residents) of one foreign currency for another, if a Central Bank rouble exchange rate is in place for both currencies. Although the Central Bank regularly quotes an exchange rate for all major currencies, trade in unusual currencies would require Central Bank approval;
- purchase and consecutive sale of a 'veksel' (promissory note), if originally issued by an authorised bank licensed to perform security transactions. Payments may also be made in roubles.
LEASE PAYMENTS IN FOREIGN CURRENCY
9. It appears that payments under leases of movable or immovable property physically located in Russia require prior approval of the Central Bank if they are paid in foreign currency unless both the lessor and the lessee are non-resident. This does not apply to lease payments by non-residents to residents for aircraft, sea and river vessels and spacecraft. Such payments may be made in foreign currency, irrespective of where the property is located, on condition that at least one payment is made in each period of 180 days, the first period starting from when the property is transferred to the lessee.
REAL ESTATE HELD BY RUSSIAN RESIDENTS
10. A provision that has not yet entered into force concerns the purchase of real estate abroad by resident individuals. Such payments will have to be made from Russian bank accounts or from licensed bank accounts held outside Russia and reported to the Central Bank.
CONCLUSION
11. Regulation 39 provides some clarification regarding the application of the 180 day rule to the transactions described above and increases the options for in-kind financing from abroad. The regulation fails, however, to liberalise the treatment of intercompany loans in foreign currency to Russian enterprises. The reporting requirements now applicable to Russian banks are quite strict and, given the severe penalties for non-compliance, banks are likely to display a very conservative approach and the administrative burden connected with making foreign currency payments is likely to increase.
This publication is intended for public guidance only and should not form the basis for specific decisions.
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