Today, when legislative requirements are changing every day and new foreign currency restrictions are replacing “old” new restrictions introduced only a week ago, it is crucial to plan your activities very carefully with the current requirements in mind and to analyze not only current, but also potential risks, while fighting the headwinds to the extent possible

Guided by the carpe diem wisdom which is now as relevant as never before,we prepared an overview of the most significant rules established by the latest acts of the President and the Central Bank of the Russian Federation being currently in effect.

ABOUT NEW ACTS

On March 18, 2022, the President signed Decree No.126 on new measures to ensure financial stability of the Russian Federation as concerns foreign currency regulation (hereinafter “Decree No.126”), and the Central Bank issued Official Clarifications No.2‑OR on how to apply Presidential Decrees No.No.79, 81 and 95 (hereinafter the “Clarifications dated 18.03.2022”).

The Government Commission for Supervision over Foreign Investments in the Russian Federation (the “Commission”) also stepped in and on March 17 adopted a resolution authorizing certain transactions on selling real estate.

ABOUT INVESTMENTS ABROAD

Pursuant to Clause 2 of Decree No.126, by December 31, 2022 the following transactions can only be performed upon prior approval of the Central Bank of the Russian Federation:

• Payment by a resident for any participation interest, contribution, unit in equity (a charter or share capital, cooperative unit investment fund) in a non-resident legal entity;
• Contribution by a resident to a non-resident under a partnership agreement with investments in the form of capital expenditures (a joint venture agreement).

Amidst the panic on the market, many individuals and companies rushed to invest in foreign business, which certainly did not go unnoticed by the government and the banking system. Most likely, the government realized that investments in foreign business do not always stem only from the intention to move capital abroad and could be the result of commercial interests and business needs of a company to operate in another jurisdiction, subject to the sanctions imposed, and it did not prohibit but rather only restricted these transactions. 

Meanwhile, it is not quite clear whether the restrictions apply to stocks, since they are not directly mentioned in Decree No.126.

It should be noted that transactions aimed at acquiring ownership title to securities being held by a foreign depositary, a foreign bank or another financial market organization located outside the Russian Federation and whose records are kept outside the Russian Federation, are not subject to control according to Clause 1.11 of the Explanatory Note of 18.03.2022, provided that settlements on such transactions are made through accounts opened with foreign banks the information on which is provided to the FTS of Russia.

At the same time, please bear in mind that although the Central Bank’s Clarifications dated 18.03.2022 were issued on the same day as Decree No.126, it is clear that they were drafted before Decree No.126 was published, and the Central Bank is explaining the provisions of earlier Presidential Decrees. 

This probably means that even the Central Bank is not always keeping up with newly introduced restrictions so as to provide their interpretation, which raises some concerns, but should be taken as a matter of fact. For this reason, you should take Clarifications dated 18.03.2022 with caution and carefully analyze the terms and conditions of the planned transaction, even if investing in stocks of foreign issuers is intended.

The procedure for obtaining permission has not been introduced yet, but should be adopted by the Central Bank by March 28, 2022. Neither the Russian Central Bank nor other banks give clear explanations on how to get approval for these transactions, and therefore, the general procedure for filing an application with attached documents about the applicant and planned transactions through the reception of the Russian Central Bank of Russia or the Online reception is proposed as a general guide.

Probably, as always we will see new rules and explanations by the end of this week.

ABOUT RESTRICTIONS ON FOREIGN CURRENCY TRANSACTIONS

Decree No.126 also authorized the Board of Directors of the Russian Central Bank to determine the limits for the following transactions:

• Advance payment under contracts (the types of which will be determined by the Board of Directors) to be transferred by a resident to non-residents. This provision does not apply to transactions of Russian individuals, banks and VEB.RF;
• Acquisition of foreign currency by non-resident legal entities on the Russian foreign exchange market;
• Money transfers (including in electronic form) between residents of states that perform non-friendly acts against the Russian Federation and residents of other states (which, accordingly, do not perform non-friendly acts).

If the amount of the listed transaction exceeds the limit set by the Board of Directors of the Russian Central Bank, a permission from the Commission will be required.

It should be noted that the restriction on advance payments may significantly affect the terms and conditions of existing and planned foreign trade contracts, and therefore the relevant clarifications of the Russian Central Bank should be taken into account when planning business activities.

The Russian Central Bank is expected to determine the list of transactions and limits by March 28, 2022.

ON  FOREIGN CITIZENSHIP

According to Clarifications dated 18.03.2022 of the Russian Central Bank and explanations on the Rosreestr web site, individuals being citizens of both the Russian Federation and a state that performs non-friendly acts against it, shall be deemed Russian residents for the purpose of foreign currency restrictions. This will allow individuals with dual citizenship to freely buy and sell Russian real estate and securities, as well as receive loans.

Please note that neither the Russian Central Bank nor Rosreestr give comments in their clarifications on whether foreign individuals with a Russian residence permit will be treated as Russian residents.

Pursuant to Article 1 of Federal Law No.173 “On currency regulation and control” dated December 10, 2003, foreign citizens and stateless persons permanently residing in the Russian Federation on the basis of a residence permit (the “Residence Permit”) are also recognized as foreign currency residents of the Russian Federation, which is expressly stated by the Russian Central Bank in Clause 1.10 of Clarification dated 18.03.2022. Meanwhile, in the next sentence, the Russian Central Bank notes that for the purposes of applying Decrees No.No.79, 81 and 95, Russian citizens with dual citizenship are deemed Russian residents, without mentioning individuals with a Residence Permit.

Thus, according to a literal interpretation of the said provisions, the Russian Central Bank introduced a new classification of foreign currency residents, which provides for “a resident meaning a Russian citizen with dual citizenship,” who does not need to obtain permission from the Commission (by logic, stateless persons should also be included here) and “a resident meaning a person having a Residence Permit along with the citizenship of a foreign state (especially a non-friendly one),” it being unclear whether such residents are deemed foreign currency residents in terms of the Presidential Decrees.

ON LIBERALIZATION OF REQUIREMENTS FOR CERTAIN FOREIGN CURRENCY TRANSACTIONS

According to Decree No.126 and the Resolution of the Commission, the following transactions do not require permission:

• Granting ruble loans to Russian residents if they are controlled by individuals/companies from non-friendly states;
• Entering into real estate sale and purchase agreements with non-resident individuals associated with non-friendly states (provided that pursuant to Presidential Decree No.95, when the said non-residents sell real estate in Russia, funds can be credited only to a special C-type account);
• Residents entering into agreements on participation in shared construction with non-residents associated with non-friendly states.

Furthermore, as the Russian Central Bank noted in Clarification dated March 18, 2022, no permission from the Commission is required for a number of transactions with foreign individuals/companies from non-friendly states, in particular, for:

• Transactions that give rise to ownership title to real estate (including properties under construction)  located outside the Russian Federation;
• Transactions with securities in the custody of and recorded by a foreign financial market organization located outside the Russian Federation.

However, payments under such transactions must be made to accounts opened by residents in foreign banks or other financial market organizations outside the Russian Federation. Such transactions do not require permission, provided that residents disclose information about these foreign accounts to the Russian tax authorities.

Moreover, the Central Bank reminded that the provisions of Decrees No.No.79 and 81 do not prevent residents from entering into agreements on amending/restructuring foreign currency loans provided to non-residents before March 1, 2022.

ABOUT MITIGATION OF RULES FOR SELLING FOREIGN CURRENCY INCOME

Decree No.79, which established the mandatory sale of 80% of foreign currency income within 3 business days from the date it is received, still remains in effect. At the same time, Decree No.126 provides for possible liberalization of the procedure in some cases, if the Russian Central Bank or the Commission grant their permission. In particular, such permission can be obtained for:

• Extending the deadline for the sale of foreign currency income (permission from the Russian Central Bank);
• Changing the share of foreign currency income subject to mandatory sale, provided that a part of it is used to repay foreign currency loans or credits issued by Russian credit institutions (permission from the Russian Central Bank);
• Changing the share of foreign currency income subject to mandatory sale, in other cases (permission from the Commission).

Therefore, the latest acts not only introduce new restrictions, but also liberalize some requirements for foreign currency transactions and operations with a foreign element, which should be taken into account when planning future activities. We believe that there will be new clarifications and explanations of the introduced requirements and, highly likely, new restrictions. Our team is committed to monitoring and promptly analyzing the legislative developments. Should you have any questions regarding the above, please contact us as convenient.