In early March, numerous legislative changes, restrictions and bans were introduced. However, it can be said without exaggeration that sanctions and anti-sanctions in the area of foreign currency regulation raised the greatest number of concerns.

The situation is developing, and highly likely, there will be new restrictions in the near future. Nevertheless, let’s have a look at the current rules.

 

Restrictions on transactions

As we wrote earlier, starting March 2, 2022 residents^[1] need to obtain a permit from the Government Commission for Supervision over Foreign Investments in the Russian Federation to enter into the following transactions with individuals/companies from countries that perform non-friendly acts (which could also include Russians):

• Transactions on granting loans and credits in Russian rubles or a foreign currency;
• Transactions that give rise to ownership title to securities and real estate;
• Transactions on such Russian residents transferring foreign currency to foreign accounts.

The imposed restrictions have caused a variety of concerns among businesses and banks. We analyzed the most common ones.

 

Who are the “individuals/companies from countries that perform non-friendly acts”?

According to Presidential Decree No.81 dated March 01, 2022, individuals/companies related to non-friendly states are, inter alia, Russian entities under control of such individuals/companies, regardless of the place of their registration.

This definition raised the most questions from the business community, as it actually limits the ability to enter into transactions between Russian companies that, until recently, were controlled by residents of friendly partner countries.

Presidential Decree No.95 dated March 05, 2022 issued before the spring holidays narrows the scope of this definition and establishes that foreign companies properly declared that are controlled by Russian individuals/companies shall not be deemed entities from countries that perform non-friendly acts against the Russian Federation. Consequently, if the ultimate beneficiary of a party to a transaction is a Russian entity, such party shall not be deemed an “individual/company from a foreign country that performs non-friendly acts.”

 

How does the permission procedure work?

The permission procedure for the said transactions was established by Resolution No.295 of the Russian Government dated March 06, 2022 (the “Rules”). For the purpose of granting permits, the Russian Ministry of Finance has set up a special panel of the Government Commission for Supervision over Foreign Investments in the Russian Federation (the “Panel”).

The following documents must be submitted to the Panel in order to get a permit for a single transaction or a group of transactions:

• Application for a permit in free form, with a description of the transaction, its subject matter, purpose, scope and material conditions, as well as the requested term of the permit.
• Documents confirming the fact of registration of the applicant with authorized bodies or their identity (for individuals), as well as constituent documents;
• Information on beneficiaries / controlling persons of the individual/company from a foreign country that perform non-friendly acts;
• Balance sheet and information on the book value of the property (when selling estate sale).

Please note that a permit must be obtained prior to the transaction. However, the Rules do not establish the response period for granting or denying the permit. We assume that, unless provided otherwise, the general period of 30 calendar days specified for response to individuals’ requests can be applied.

It should be noted that the language of the Rules also raises some issues and contradictions in terms of determining the list of operations subject to the restrictions. For instance, Subclause a Clause 5 of the Rules defining the content of the application mentions shares in limited liability companies along with stock. At the same time, as of today, there are no statutory restrictions on transactions with LLC shares.

 

Prospects of obtaining a permit

It seems critical that the Rules omit any regulation of the criteria and features to be taken into account when considering the application and deciding on granting or denying a permit. Moreover, the Rules do not contain any procedure for appealing against a denial.

As a result, they prescribe a quite broad margin of discretion for the Panel and its members, while not giving businesses any clear guidelines for predicting whether they will receive such a permit.

 

Special procedure for fulfilling obligations to non-residents

In addition to the restrictions on transactions, Presidential Decree No.95 dated March 05, 2022 introduced a special procedure for fulfilling obligations before certain foreign creditors (the “Procedure”).

 

Who is subject to the Procedure?

Russian debtors (including Russia, its constituent entities and municipal formations) in respect to transactions with foreign creditors being individuals/companies that are from countries that perform non-friendly acts or are controlled by them, regardless of the place of their registration (except for Russian companies).

 

Which operations are subject to the Procedure?

The Procedure applies to existing obligations under credits, loans and financial instruments.

The Procedure applies to the obligations in the amount exceeding RUB 10 million (or equivalent in a foreign currency) per calendar month.

 

How must such obligations be fulfilled?

In order to fulfill obligations under the relevant transactions, residents must open a special C-type account in the name of their foreign creditors in Russian credit institutions (the central financial instruments depositary), and then transfer amounts due to the said account in Russian rubles.

 

How can these funds be used?

Foreign creditors will be entitled to apply to the credit institution/depositary for using the funds received in a manner prescribed by the Russian Central Bank or the Ministry of Finance (which has not been established yet). Most likely, their ability to use such funds will also be limited to the territory of Russia.

 

Procedure for withdrawals from foreign-currency accounts

On March 9, the Russian Central Bank introduced a new temporary procedure for operations with foreign cash, which be in effect from March 09, 2022 to September 09, 2022. Under the procedure, individuals may withdraw cash in the maximum amount of USD 10,000 from their foreign-currency accounts (in each bank where they have an account), while the remaining part may be withdrawn only in Russian rubles at the market rate on the date of withdrawal.

Cash may be withdrawn only in US dollars, regardless of the currency of the account. It will be converted at the market rate.

Moreover, banks will not sell foreign cash to individuals; however, they may convert any amount of foreign currency to Russian rubles.

 

Restrictions on transfer of foreign currencies abroad

By several instructions (letters No.IN-019-12/27 dated March 05, 2022 and No.IN-019-12/21DSP dated March 01, 2022), the Russian Central Bank imposed a limit of USD 5,000 or its equivalent in other foreign currency per month on individuals transferring foreign currency to accounts abroad (both to relatives and other persons)

 

Sale of foreign currency income

As we wrote earlier, Presidential Decree No.79 dated March 01, 2022 still requires resident companies involved in foreign trade to sell 80% of their foreign currency income within 3 business days from the date of its receipt.

 

Restrictions on payments on securities

On February 28, the Russian Central Bank sent to depositories and registrars the Instructions on suspension of certain operations with securities of Russian issuers:

• Writing off securities from personal or custody accounts opened for foreigners (except operations without consent from a person exercising rights to securities and operations on custody accounts as instructed or provided by a clearing report of a clearing organization);
• Making payments on securities of Russian issuers in favor of foreigners.

We would like to note that so far, these restrictions apply only to depositories and registrars, and therefore, technically, a joint stock company can still directly pay dividends to a foreign shareholder, but only to their Russian account. At the same time, registrars warn that even payment of dividends to foreign shareholders can be risky, given the restrictions imposed, and recommend refraining from such operations for a while.

Please note that despite the variety of foreign-currency measures adopted, currently, there are no restrictions on payment for services, works or goods in favor of foreign service providers, which the Russian Central Bank has also repeatedly noted in its explanation of the procedure for applying restrictions on its official web site.

Our team is committed to helping you understand the restrictions being introduced.  Should you have any questions regarding the above, please contact us as convenient.