Russian Counter-sanctions on Currency Operations

January 31, 2023

BRACE Law Firm ©

Sanctions restrictions against the Russian Federation, its citizens, and organizations are being introduced gradually, affecting nearly all spheres of activity. Concurrently, as responsive special economic measures, the Russian Federation is introducing counter-sanctions against unfriendly states and organizations, including measures in the sphere of currency regulation. Special economic measures are temporary and apply regardless of other measures aimed at protecting the interests of the Russian Federation, ensuring its security, and protecting the rights and freedoms of its citizens. [1] To regulate financial stability and respond to the introduced sanctions restrictions, the President of Russia has adopted various decrees governing these responsive measures:

• Presidential Decree No. 79 dated February 28, 2022, On the Application of Special Economic Measures in Connection with the Unfriendly Actions of the United States of America and Foreign States and International Organizations Associated with Them (the "Decree No. 79");
• Presidential Decree No. 252 dated May 3, 2022, On the Application of Responsive Special Economic Measures in Connection with the Unfriendly Actions of Certain Foreign States and International Organizations;
• Presidential Decree No. 81 dated March 1, 2022, On Additional Temporary Economic Measures to Ensure the Financial Stability of the Russian Federation (the "Decree No. 81").

Effective March 1, 2022, Decree No. 79 prohibited the following actions:

• Executing currency operations related to residents providing foreign currency to non-residents under loan agreements;
• Residents crediting foreign currency to their accounts (deposits) opened in banks and other financial market organizations located outside the Russian Federation, as well as transferring funds without opening a bank account using electronic means of payment provided by foreign payment service providers.

However, the Sub-commission of the Government Commission on Monitoring Foreign Investment in the Russian Federation unanimously decided to allow residents, through March 31, 2023, to perform currency operations involving the provision of foreign currency under loan agreements to non-residents who are not foreign persons associated with foreign states committing unfriendly actions against the Russian Federation or Russian legal entities and individuals, and who are not foreign persons under the control of said foreign persons, regardless of their place of registration or principal place of business. [2]

The Sub-commission also unanimously decided to allow residents (individuals) to credit funds related to the receipt of dividends on shares of Russian joint-stock companies or the distribution of profits of Russian limited liability companies, business partnerships, and production cooperatives to accounts (deposits) opened in banks located outside the Russian Federation that are subsidiaries of authorized banks, as defined in accordance with Clause 8 of Part 1 of Article 1 of Federal Law No. 173-FZ dated December 10, 2003, within the general limits established by the Bank of Russia. [3]

Furthermore, Decree No. 79 imposed an obligation on residents participating in foreign trade to sell foreign currency credited to their accounts in authorized banks under foreign trade contracts concluded with non-residents involving the transfer of goods, provision of services, performance of work, or transfer of intellectual property results (including exclusive rights thereto). This sale must be in an amount determined by the Government Commission on Monitoring Foreign Investment in the Russian Federation and within the timeframe established by the Board of Directors of the Central Bank of the Russian Federation. However, effective June 10, 2022, the Sub-commission unanimously decided to allow residents participating in foreign trade to perform the mandatory sale of foreign currency at a rate of 0 percent of the amount credited to their accounts under such foreign trade contracts. [4]

In December 2022, Presidential Decree No. 942 dated December 22, 2022, On Amending Presidential Decree No. 252 dated May 3, 2022, On the Application of Responsive Special Economic Measures in Connection with the Unfriendly Actions of Certain Foreign States and International Organizations, introduced a provision granting the Government of the Russian Federation the authority to issue temporary permits for the execution of specific transactions (operations or actions) with sanctioned persons.

Concurrently, to ensure financial stability, Decree No. 81 adopted additional temporary economic measures:

1. A special procedure was established for residents to execute (perform) transactions (operations) with foreign persons:

• Transactions (operations) involving the provision of credits and loans (in rubles) to persons of foreign states committing unfriendly actions, except where such provision is prohibited by the regulatory legal acts of the Russian Federation;
• Transactions (operations) resulting in the creation of ownership rights to securities and real estate executed (performed) with persons of foreign states committing unfriendly actions.

2. The transactions (operations) provided for in the preceding paragraph may be executed (performed) based on permits issued by the Government Commission on Monitoring Foreign Investment in the Russian Federation, which may, if necessary, contain conditions for the execution (performance) of such transactions (operations).

3. Such transactions (operations) with foreign persons who are not persons of foreign states committing unfriendly actions—where the subject of the transactions (operations) is securities or real estate acquired by said foreign persons from persons of foreign states committing unfriendly actions after February 22, 2022—shall be executed (performed) in accordance with the established procedure.

4. Transactions (operations) resulting in the creation of ownership rights to securities may be executed on organized trades based on permits issued by the Central Bank of the Russian Federation in coordination with the Ministry of Finance of the Russian Federation, containing conditions for the execution (performance) of such transactions (operations).

5. The procedure for executing (performing) transactions (operations) provided for by Decree No. 81 does not apply to transactions (operations) where the Central Bank of the Russian Federation or state bodies are a party.

6. Credit institutions may transfer funds in foreign currency to correspondent accounts in non-resident banks, subject to the restrictions provided for by Decree No. 81.

7. Effective March 2, 2022, the export from the Russian Federation of cash foreign currency and (or) monetary instruments in foreign currency in an amount exceeding the equivalent of 10,000 US dollars, calculated at the official exchange rate of the Central Bank of the Russian Federation established on the date of export, is prohibited.

To issue permits, the Government Commission on Monitoring Foreign Investment in the Russian Federation approved a corresponding procedure.[5] The form of the application for a permit to execute (perform) a transaction (operation) or a group of transactions (operations) was determined at a meeting of the Sub-commission of the Government Commission.[6] This application must include the following documents:

• A request for a permit to execute (perform) a transaction (operation), containing information on the purpose, subject, content, and material terms of the transaction (operation), and the planned duration of such permit, addressed to the Commission and drafted in free form. (In cases where the transaction results in the direct or indirect establishment, change, or termination of ownership, use, and (or) disposal rights regarding shares or interests (contributions) in the charter (share) capital of a business entity or partnership, or votes attributable to such shares or interests, the request must specify the number of such shares, interests, or votes);
• A document confirming the state registration of the applicant as a legal entity or an individual as an individual entrepreneur in accordance with the laws of the relevant state, or another document confirming the creation of the applicant legal entity;
• An identity document of the applicant (individual);
• A document confirming the establishment of the applicant (a foreign organization that is not a legal entity) in accordance with the laws of the state where it was established;
• Constitutive documents of the applicant (legal entity);
• A document containing information on the beneficiaries, beneficial owners, and the person exercising control over the person of a foreign state committing unfriendly actions (or a person associated with such a state) who is a party to the transaction (participant in the operation), and the criteria for such control;
• The resident's balance sheet as of the last reporting date preceding the application date, if such balance sheet is unavailable in the state information resource for accounting (financial) statements in accordance with the Federal Law On Accounting;
• Information on the book value of the resident's assets as of the last reporting date preceding the application date.

The application must also include a request for the permit, drafted in free form and containing a justification for its issuance for certain transactions, or a free-form request with a justification and information on Eurobond issues for which payment is made (including issuance terms, ISIN, issue volume, maturity date, total payment amount, and the amount intended for credit to a type "D" account or a type "D" nominal account) for other transactions.

Additionally, as further economic measures, Presidential Decree No. 126 dated March 18, 2022, On Additional Temporary Economic Measures to Ensure the Financial Stability of the Russian Federation in the Sphere of Currency Regulation, was signed. This Decree granted the Board of Directors of the Central Bank of the Russian Federation the authority to determine the transaction amount limits within which the following may be performed:

1. Prepayment or advance payments by residents to foreign legal entities and individuals who are non-residents under contracts, the types of which are determined by the Board of Directors of the Central Bank of the Russian Federation.

2. Transfers of funds from accounts opened in Russian credit institutions:

• From the accounts of non-resident foreign legal entities registered in foreign states committing unfriendly actions against the Russian Federation or Russian legal entities and individuals (the "Foreign Persons of States Committing Unfriendly Actions"), to the accounts of non-resident foreign legal entities that are not Foreign Persons of States Committing Unfriendly Actions;
• From the accounts of non-resident foreign legal entities that are not Foreign Persons of States Committing Unfriendly Actions, to accounts opened in foreign states committing unfriendly actions against the Russian Federation or Russian legal entities and individuals (the "Foreign States Committing Unfriendly Actions").

3. Transfers (without opening accounts) of funds, including electronic funds:

• By Foreign Persons of States Committing Unfriendly Actions to non-resident foreign legal entities that are not Foreign Persons of States Committing Unfriendly Actions;
• By non-resident foreign legal entities that are not Foreign Persons of States Committing Unfriendly Actions to banks and other financial market organizations located in Foreign States Committing Unfriendly Actions.

4. Purchases of foreign currency on the domestic currency market of the Russian Federation by non-resident legal entities.

Furthermore, until December 31, 2023, the execution of the following operations without permits from the Central Bank of the Russian Federation was prohibited:

• A resident paying for an interest, contribution, or share in the property (charter or share capital, or a cooperative's share fund) of a non-resident legal entity;
• A resident making a contribution to a non-resident under a simple partnership agreement involving investment in the form of capital expenditures (joint venture agreement).

However, pursuant to Decision of the Bank of Russia Working Group No. PRG-12-4/1383 dated June 23, 2022,[7] it was decided that effective June 1, 2022, residents may execute operations to pay for interests, contributions, or shares in the property (charter or share capital, or a cooperative's share fund) of non-resident legal entities, as well as make contributions to non-residents under simple partnership agreements involving investment in the form of capital expenditures (joint venture agreements) (the "Operation"), without obtaining individual permits from the Bank of Russia, provided one of the following conditions is met:

• The Operation is executed in rubles or in the foreign currency of states not classified as states committing unfriendly actions against the Russian Federation or Russian legal entities and individuals, regardless of the location of the recipient of such funds;
• The Operation is executed in the foreign currency of states committing unfriendly actions against the Russian Federation or Russian legal entities and individuals, regardless of the location of the recipient of such funds, in an amount not exceeding the equivalent of 15 million rubles at the official exchange rate of the Central Bank of the Russian Federation on the date of payment.

Given the involvement of the Russian Federation in international foreign trade, currency regulation legislation will inevitably continue to evolve due to changing external political and economic circumstances. Special state monitoring of currency regulation is a necessary measure to protect the national interests of the Russian Federation and ensure financial stability.

Despite the sanctions restrictions imposed by foreign states and the necessary responsive economic measures, monitoring changes in currency regulation remains a vital element of business activity — especially if it involves interaction with foreign states on various matters — as well as for individuals for personal purposes.

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References

[1] Article 3 of Federal Law No. 281-FZ dated December 30, 2006, On Special Economic Measures and Compulsory Measures.

[2] Extract from the Minutes of the Meeting of the Sub-commission of the Government Commission on Monitoring Foreign Investment in the Russian Federation No. 120/1 dated December 27, 2022 (communicated by the Ministry of Finance of Russia No. 05-06-10/VN-67865 dated December 30, 2022).

[3] Extract from the Minutes of the Meeting of the Sub-commission of the Government Commission on Monitoring Foreign Investment in the Russian Federation No. 78/1 dated August 10, 2022 (communicated by the Ministry of Finance of Russia No. 05-06-10/VN-42064 dated August 17, 2022).

[4] Extract from the Minutes of the Meeting of the Sub-commission of the Government Commission on Monitoring Foreign Investment in the Russian Federation No. 61 dated June 9, 2022 (communicated by the Ministry of Finance of Russia No. 05-06-05/VN-29704 dated June 10, 2022).

[5] Decree of the Government of Russia No. 295 dated March 6, 2022, On Approving the Rules for the Issuance of Permits by the Government Commission on Monitoring Foreign Investment in the Russian Federation for the Purpose of Implementing Additional Temporary Economic Measures to Ensure the Financial Stability of the Russian Federation and Other Permits Provided for by Individual Decrees of the President of the Russian Federation, and the Exercise of Other Powers for Said Purposes and Amending the Regulations on the Government Commission on Monitoring Foreign Investment in the Russian Federation.

[6] Extract from the Minutes of the Meeting of the Sub-commission of the Government Commission on Monitoring Foreign Investment in the Russian Federation No. 9 dated March 14, 2022 (communicated by the Ministry of Finance of Russia No. 05-06-10/VN-12520 dated March 17, 2022).

[7] Decision of the Bank of Russia Working Group No. PRG-12-4/1383 dated June 23, 2022, On Considering Issues of Issuing Permits for the Execution (Performance) of Operations (Transactions) by Residents and Non-residents in Respect of Which Prohibitions (Restrictions) on Their Execution Have Been Established in Connection with the Unfriendly Actions of Foreign States.