Foreign Trade Contract Settlements & Payments in Russia: Legal Guide

January 31, 2023

BRACE Law Firm ©

A critical section of a foreign trade contract defines the settlement procedure between counterparties, the payment currency, payment deadlines, exchange rate-based calculations, and other financial terms. The financial conditions of a foreign trade contract include:

• establishing the cost and currency of the price of the goods;
• payment deadlines;
• terms for payment of transport costs;
• payment methods (cash/non-cash settlements, advance payments, etc.);
• forms of settlement (collection, bank transfer, etc.);
• banking details;
• supporting documents for payment, and other relevant terms.

Establishing the cost of the goods determines the value of specific items, while establishing the currency of the goods determines the currency in which settlements will occur (the currency of the exporter, the importer, or another currency selected by the contract parties). Furthermore, according to Article 55 of the United Nations Convention on Contracts for the International Sale of Goods (the "Vienna Convention"), where a contract has been validly concluded but does not expressly or implicitly fix or make provision for determining the price, the parties are considered, in the absence of any indication to the contrary, to have impliedly made reference to the price generally charged at the time of the conclusion of the contract for such goods sold under comparable circumstances in the trade concerned. It is also important to note that, under Article 317(3) of the Civil Code of the Russian Federation (the "Civil Code"), the use of foreign currency and payment documents in foreign currency for settlements on the territory of the Russian Federation is permitted in cases, under the procedure, and on the terms determined by law or in the manner prescribed by law. The governing law in the sphere of currency interaction is Federal Law No. 173-FZ On Currency Regulation and Currency Control (the "Law No. 173-FZ").

In most cases, Russian entrepreneurs concluding foreign trade contracts preferred to specify the US Dollar or Euro as the settlement currency. However, due to political and economic events, the SWIFT payment system disconnected most Russian banks, leading to significant changes in the currency terms of foreign trade contracts. Generally, these measures resulted in several options for further interaction between counterparties. Parties settled their continued cooperation either by signing an addendum to the existing contract or by terminating the old contract and entering into a new one that reflected the terms of interaction under changed circumstances.

The following basic concepts relate to settlements under a foreign trade contract:

• Payment Deadlines may be set as specific dates or based on certain events (shipment of cargo, readiness of cargo for shipment, etc.). If the buyer is not bound to pay the price at any other specific time, the buyer must pay it when the seller places either the goods or documents controlling their disposition at the buyer's disposal in accordance with the contract and the Vienna Convention. The seller may make such payment a condition for handing over the goods or documents. [1]
• Terms for Payment of Transport Costsare jointly selected by the parties to an international trade contract and reflected in the terms of the foreign trade contract.
• Payment Methodsinclude the terms for the transfer of funds.
• Forms of Settlementinclude provisions for the use of banking or credit payment instruments.
• Banking Detailsof the parties are also included in the settlement and payment section because funds are typically transferred via bank transfer from the seller's bank to the buyer's bank.
• Supporting Documentsfor making payments under a foreign trade contract are also detailed in the "Financial Terms of the Contract" section. In this regard, the buyer must pay the price on the date fixed by or determinable from the contract and the Vienna Convention without the need for any request or compliance with any formality on the part of the seller.[2]

The settlement and payment procedure under a foreign trade contract may include other terms essential for transferring funds from the importer to the exporter for delivered goods.

When drafting a foreign trade contract, one must distinguish between the currency of the debt and the currency of payment. This distinction arises because the currency of the debt expresses the monetary obligation. By virtue of an obligation, one person (the debtor) must perform a specific action in favor of another person (the creditor), such as: transferring property, performing work, rendering a service, contributing to a joint activity, paying money, etc., or refraining from a certain action, while the creditor has the right to demand the performance of this duty from the debtor. [3] Meanwhile, the currency of payment is the currency in which the settlement under the foreign trade contract is executed. Often, when concluding foreign trade contracts, the currency of debt differs from the currency of payment; therefore, reconciling these two currencies is a vital condition when entering into a contract.

Additionally, a monetary obligation may provide that it is payable in rubles in an amount equivalent to a specific sum in a foreign currency or in conventional monetary units (ECU, "Special Drawing Rights," etc.). In such cases, the amount payable in rubles is determined at the official exchange rate of the relevant currency or conventional units on the date of payment, unless a different rate or a different date for its determination is established by law or by agreement of the parties. [4]

Regarding the currency for performing a monetary obligation, the Presidium of the Supreme Arbitration Court of the Russian Federation expressed its opinion in Information Letter No. 70 dated November 4, 2002, On the Application by Arbitration Courts of Articles 140 and 317 of the Civil Code of the Russian Federation. It stated: "When resolving the issue of which currency should be specified in a judicial act for the recovery of monetary sums, arbitration courts must determine the currency in which the monetary obligation is expressed (the currency of the debt) and the currency in which this monetary obligation must be paid (the currency of the payment) based on Articles 140 and 317 of the Civil Code. In cases where the use of foreign currency as a means of payment is permitted on the territory of the Russian Federation, the obligation may be expressed in foreign currency. If a contract expresses a monetary obligation in foreign currency without specifying that it is payable in rubles, the court should treat such a contractual provision as provided for by Article 317(2) of the Civil Code, unless the court reaches a different conclusion when interpreting the contract in accordance with the rules of Article 431 of the Civil Code."

Thus, parties to a foreign trade contract may express the contract price in foreign currency. However, they must specify the amount required for payment for the service rendered, goods delivered, or work performed, and must mandatory specify the name of the currency. It is important to note that for Russian contracts, the payment currency is generally the ruble, as currency transactions between residents are prohibited as a general rule; exceptions to this rule are listed in Article 9(1) of the Law No. 173-FZ.

Under all the listed circumstances, the date of determining the exchange rate is also vital. Not only the cost of the goods, services, or work depends on this date, but also other contractual conditions tied to the price, such as delivery, insurance, penalties, etc.

Considering the provisions of Article 317(2) of the Civil Code, the amount payable in rubles is determined by the official exchange rate of the relevant currency on the date of payment. This same position regarding the determination of the exchange rate is expressed in the Resolution of the Plenum of the Supreme Court of the Russian Federation,[5] which states that if the law or an agreement between the parties does not establish the exchange rate and the date of conversion, the court, in accordance with Article 317(2) of the Civil Code, indicates that conversion is carried out at the official exchange rate on the date of actual payment. To minimize disputes, parties to a foreign trade contract must clearly agree on all important payment terms and include them in the contract because the entire contract value can depend on the daily fluctuation of exchange rates. Furthermore, debiting funds on one day and crediting them on another can lead to discrepancies in the total amount.

Given the dependence of the contract price on the exchange rate, parties to international transactions often agree on a so-called "currency corridor," which represents a minimum and/or maximum rate at which the payment will be made. If the parties do not provide for such a condition, payment must be made at the prevailing rate, regardless of its cost. Moreover, a sharp change in the exchange rate does not constitute a substantial change in circumstances under Article 451 of the Civil Code. The Supreme Court of the Russian Federation expressed this position in its 2017 review. [6]

Another essential condition for a foreign trade contract is the timeline, including deadlines for advance payments and final payment. It is important to note that contract terms may provide for full or partial advance payment, as well as payment upon delivery. A payment is considered an advance payment if it is made before the goods are imported into the customs territory of the Russian Federation or before the customs clearance of the imported goods. In this context, deadlines are particularly important when settling with a counterparty and adhering to all agreements, as the payment is tied to the exchange rate.

In addition to various foreign trade contract terms regarding payments, it must be noted that when engaging in foreign trade activities or when residents provide loans in foreign currency or rubles to non-residents, residents must, unless otherwise provided by law, ensure the return to the Russian Federation of funds paid to non-residents for goods not imported (not received in the RF), work not performed, services not rendered, information and results of intellectual activity not transferred, including exclusive rights to them, within the timeframes provided for by the foreign trade contracts or loan agreements. [7]

The importance of specific timing in foreign trade contracts is undoubtedly substantial; this applies not only to payments but also to the transfer of title. Given that foreign trade contracts involve not only international law and relevant conventions but also the national laws of the states where the counterparties are located, it is essential to clearly define and record all applicable norms, methods for calculating deadlines and payments, the governing law, etc.

To simplify interaction under foreign trade contracts, parties to an international transaction use Incoterms to define delivery terms, which regulate generally recognized international trade standards. Parties often prefer to select delivery terms from Incoterms, which significantly facilitates the drafting of an international contract. Since Incoterms also reflect terms for the distribution of transport costs, these international rules are actively used by participants in foreign trade transactions.

However, the choice of the Incoterms delivery basis affects the calculation of the customs value of the foreign trade contract. Incorrectly choosing Incoterms delivery terms leads not only to changes in the contract terms but also to changes in the customs value of the goods transported across the customs border. Thus, the customs value of goods exported from the Russian Federation is determined not only in accordance with the Customs Code of the Eurasian Economic Union but also in accordance with Decree of the Government of the Russian Federation No. 1694 dated December 16, 2019, On Approval of the Rules for Determining the Customs Value of Goods Exported from the Russian Federation. This Decree also specifies the methods for determining the customs value of exported goods. Regarding imported goods, the determination of the customs value of goods imported into the Russian Federation is carried out in accordance with Chapter 5 of the EAEU Customs Code. [8] The declarant determines the customs value of goods imported into or exported from the Russian Federation during the declaration process, except in cases where the customs value is determined by the customs authority in accordance with the EAEU Customs Code.

It is also significant to note that foreign trade contracts typically include a section on liability related to settlements and payments for breaches of contract obligations. The calculation of penalties depends on various factors, including breaches of delivery deadlines, the quality of delivered goods, payment delays, etc. According to Article 74 of the Vienna Convention, damages for breach of contract by one party consist of a sum equal to the loss, including lost profits, suffered by the other party as a consequence of the breach. Furthermore, if a party fails to pay the price or any other sum that is in arrears, the other party is entitled to interest on it, without prejudice to any claim for damages recoverable under Article 74 of the Vienna Convention. [9] At the same time, a party is not liable for a failure to perform any of its obligations if it proves that the failure was due to an impediment beyond its control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of the contract or to have avoided or overcome it or its consequences. [10] The Chamber of Commerce and Industry of the Russian Federation (the "CCI RF") certifies force majeure circumstances in Russia in accordance with the Regulation on the Procedure for Certification of Force Majeure Circumstances (Force Majeure) by the Chamber of Commerce and Industry of the Russian Federation. [11] Force majeure circumstances include: natural disasters (earthquake, flood, hurricane), fire, mass diseases (epidemics), strikes, military actions, terrorist acts, sabotage, transport restrictions, restrictive measures by states, prohibitions of trade operations, including with specific countries, resulting from international sanctions, and other circumstances independent of the will of the parties to the contract. [12]

Moreover, in addition to penalties from counterparties, one must remember that violating currency legislation also entails administrative liability under the CAO RF[13] or criminal liability under the Criminal Code of the Russian Federation under Article 193, Evasion of Duties to Repatriate Funds in Foreign Currency or the Currency of the Russian Federation, or Article 193.1, Execution of Currency Operations for the Transfer of Funds in Foreign Currency or the Currency of the Russian Federation to the Accounts of Non-residents Using Forged Documents.

To avoid unpleasant consequences when performing foreign trade contracts — not only from customs authorities but also from international counterparties — it is vital to draft foreign trade contracts professionally, consider all necessary terms, specify them clearly, and monitor the legislation regulating foreign trade activities, especially under sanctions and counter-sanctions. This approach will reduce the possibility of adverse consequences from both counterparties and regulatory authorities.

__________________________________

References

1. Article 58 of the Vienna Convention.
2. Article 59 of the Vienna Convention.
3. Article 307(1) of the Civil Code of the Russian Federation.
4. Article 307(2) of the Civil Code of the Russian Federation.
5. Resolution of the Plenum of the Supreme Court of the Russian Federation No. 54 dated November 22, 2016, On Certain Issues of the Application of the General Provisions of the Civil Code of the Russian Federation on Obligations and Their Performance.
6. Review of the Judicial Practice of the Supreme Court of the Russian Federation No. 1 (2017) (approved by the Presidium of the Supreme Court of the Russian Federation on February 16, 2017).
7. Article 19(1) of the Law No. 173-FZ.
8. Article 23(1) of Federal Law No. 289-FZ dated August 3, 2018, On Customs Regulation in the Russian Federation and on Amending Certain Legislative Acts of the Russian Federation.
9. Article 78 of the Vienna Convention.
10. Article 79(1) of the United Nations Convention on Contracts for the International Sale of Goods.
11. Regulation on the Procedure for Certification of Force Majeure Circumstances (Force Majeure) by the Chamber of Commerce and Industry of the Russian Federation (Annex to Resolution of the Board of the CCI RF No. 173-14 dated December 23, 2015).
12. Clause 1.3 of the Regulation on the Procedure for Certification of Force Majeure Circumstances (Force Majeure) by the Chamber of Commerce and Industry of the Russian Federation.
13. Article 15.25 of the CAO RF, Violation of the Currency Legislation of the Russian Federation and Acts of Currency Regulation Authorities.