LawFlash

Update: Russia Further Tightens Currency Control Regulations and Directs Banks to Scrutinize Payments Made Abroad

March 22, 2022

As another measure to support Russia’s financial market, Presidential Decree No. 126 imposes further limitations on cross-border monetary transfers for both Russian and non-Russian residents. However, Decree No. 126 also gives Russian regulators broad discretion to make exceptions from the previously adopted general bans and specific restrictions.

Decree No. 126, "On Additional Temporary Economic Measures to Ensure Financial Stability of the Russian Federation in the Sphere of Currency Control,” of 18 March further narrows the scope of foreign currency transactions in which Russian residents and nonresidents may engage. The restrictions imposed by Decree No. 126 are to supplement and clarify those restrictions that were enacted by the earlier presidential decrees of 28 February and 1 March 2022.

Importantly, Decree No. 126 continues the trend of granting more powers and more flexibility to Russia’s Central Bank in regulating the Russian financial market.

Thresholds for Certain Transactions

Under Decree No. 126, the following transactions are only permitted within the thresholds to be set forth by the Central Bank's board of directors not later than 28 March 2022:

  • Any preliminary payment or advance payment by a Russian resident (other than any natural person, any credit institution, or VEB.RF) to a nonresident (whether a natural person or legal entity) under certain types of contracts, the list of which is yet to be identified by the Central Bank's board of directors.
  • Debiting a Russian bank account of a non-Russian resident (whether a natural person or legal entity) from an "unfriendly state" toward making any transfer in any currency to a non-Russian resident registered in a country that is not on the list of "unfriendly states" (a “suitable state”)
  • Debiting a Russian bank account of a non-Russian resident (whether a natural person or legal entity) registered in a suitable state toward making any transfer in any currency to any bank account opened in an "unfriendly state"
  • Epayments (without opening bank accounts, including electronic money transfers) by a foreign person (whether a natural person or legal entity) from "unfriendly states" to a non-Russian resident registered in a suitable state or by the latter to any bank or other financial institution in any "unfriendly state"
  • Purchase of foreign currency on the Russian market by any legal entity that is a non-Russian resident

Any transaction from the above list that is in excess of the threshold to be set forth by the Central Bank requires approval of the Government Commission for Foreign Investment Control (the Government Commission).

Central Bank's Prior Consent

Until 31 December 2022, the following transactions require the prior consent of the Central Bank:

  • Payment by a Russian resident for any participation interest, share, or unit comprising equity of a nonresident entity or unit fund. According to the clarification made by the Central Bank on 18 March 2022, the consent requirement does not cover listed financial instruments that a Russian resident may buy through a stock exchange (such transactions, however, might require the Government Commission's approval if the counterparty is a non-Russian resident (see our LawFlash)), and only targets equity capital of limited liability companies, other private companies, and unit funds.
  • Transfer of funds by a Russian resident to a non-Russian resident toward payment of any investment contribution under a partnership agreement or investment into an unincorporated partnership.

The Central Bank is likely to adopt implementing regulations by 28 March 2022.

Further Enhancement to Mandatory Sale of FX Proceeds

Decree No. 126 also gives further powers and discretion to the Central Bank in enforcing various currency control measures enacted earlier. In particular, the Central Bank may issue authorizations to certain Russian residents allowing them to:

  • Divert from the three-business-day term for mandatory sale of 80% of their foreign currency proceeds and allow for a different term for such sale.
  • Exclude certain foreign currency proceeds from the mandatory sale in such amounts that are necessary to service their foreign currency nominated debt with Russian credit institutions (including principal debt, accrued interest, and penalties).

Separately, Russian residents may apply to the Government Commission to change (i.e., lower) the percentage of the foreign currency proceeds subject to mandatory sale. The implementing regulation is expected to be enacted by 28 March 2022.

Furthermore, the Central Bank is expressly authorized to make official clarifications on the enforcement of Decree No. 126. This is not customary under Russian law, as typically authorities would avoid giving any official clarifications on regulatory norms or enforcement practices and the final interpretation would be given by court in case there is a dispute.

Scrutiny over Wire Transfers

On 16 March 2022, the Central Bank issued a letter to banks and other financial institutions (regulated institutions) urging them to pay additional attention to transactions of natural persons and legal entities related to transfers of funds and assets by nonresidents from "unfriendly states" abroad that may be attempting to circumvent the imposed restrictions.

According to the letter, any transactions that are not typical for a client or are a change in the structure of the client's spending may be signs of such circumvention. Further, a series of repeated transactions of the same type that was not ordinary for a client earlier may indicate that the client is acquiring goods for "follow-on re-sale," is engaged in transferring funds abroad, or is dealing with cryptocurrencies. Upon identifying any such signs, a regulated institution must perform enhanced checks on the client and consider refusing to process the client’s instruction by reference to the Russian anti-money laundering laws.

Given the above, even pending the adoption of implementing regulations envisaged by Decree No. 126, one may expect that the transactions covered by Decree No. 126 will be subject to heightened scrutiny by Russian regulated institutions.

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Contacts

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