The purpose of the alert is to provide an update on the current rules regarding
the non-repatriation of funds under transactions with non-residents in view of Official Clarification of the Central Bank of the Russian Federation No. 11-OR issued on 23 November 2022.Offset of claims under cross-border transactions as a response to restrictions of Hostile Jurisdictions
It is commonly known that the recent Russian regulatory requirements for settlements under transactions with non-residents have been softened and are currently aimed at alleviating the position of Russian residents under restrictive measures of the Hostile Jurisdictions.
Albeit many questions remain, many experts agree that in a situation of existing financial and banking problems connected with the receipt of export proceeds from non-residents, legislative initiatives to permit a set-off in transactions with non-residents would provide Russian exporters with an opportunity to conduct foreign economic operations, including the restructuring of debt obligations, without unnecessary costs or penalty exposures.
Russian currency control legislation is premised on the legal concept establishing that when carrying out an offset, residents have the right not to credit currency to their bank accounts with authorised Russian banks only in the cases established by law.
That said, the current regulatory framework (Decrees of the President of the Russian Federation and the Federal Law on Currency Regulation) does not accurately identify all types of foreign economic transactions for which setting off claims with non-residents is allowed.
It was very unclear how Decree No. 529 correlates with article 19 of the Federal Law on Currency Regulation regarding the possibility of a set-off in foreign trade activities and/or the provision and repayment of loans with non-residents. In view of this on 23 November 2022 the Central Bank issued Official Clarification No. 11-OR, according to which the rules of the Federal Law on Currency Regulation were not changed in respect of the set-off for such foreign trade transactions from the date of Decree No. 529 until the date of the official clarification of the Central Bank of the Russian Federation.Setting off claims against non-residents under loan agreements
The problem was caused by the fact that the legislative procedure takes a lot of time to change the regulation. As a result, various elements of regulatory treatment for settlements under foreign trade transactions have been vested to the legal authority governed by the Decrees of the Russian President, not laws. In particular, before the amendments to the Law on Currency Regulation were introduced, with regards to foreign trade activities and/or providing and repaying loans to Russian legal entities and individual entrepreneurs ("Residents
"), the following was allowed
Non-repatriation of funds
- a set-off of claims towards non-residents and liabilities to non-residents; or
- a swap of obligations of non-residents with new obligations.
Decree No. 529 also established that until amendments are made to the Law on Currency Regulation, the following regulation does not apply
in relation to foreign trade activities and/or the giving and repayment of loans:
Amendments to the Federal Law on Currency Regulation
- requirements for Residents to receive payment (in a foreign currency or Russian roubles) from non-residents to their bank accounts with a Russian bank for goods, work, services, information and results of intellectual activity (including exclusive rights to them) transferred to the non-residents (or, conversely, not received from them, but prepaid); and
- claims for receipt of monetary funds due under loan agreements with non-residents (collectively points (1) and (2) — "Repatriation").
From 13 October 2022, amendments to clause 2 of article 19 of the Federal Law on Currency Regulation, as were introduced by Federal Law No. 353-FZ dated 14 July 2022, which instituted the authority of the Government of the Russian Federation to determine the list of permitted cases of a set-off with non-residents upon agreement with the Central Bank of Russia
, entered into force. However, no list has been introduced and currently there is only a draft resolution of the Government of the Russian Federation.What does this mean in practice?
As the Federal Law on Currency Regulation was amended with the effect from 13 October 2022, but the Government of the Russian Federation has not yet approved a list of permitted cases of a set-off in transactions with non-residents, Residents have had many practical questions about the possibility of performing a set-off after 13 October 2022
From a practical perspective, one possible interpretation of the existing regulation is that the current rules should be interpreted under a formal basis. This approach suggests that after the entry into force on 13 October 2022 of the amendments to the Federal Law on Currency Regulation, which do not provide
for the non-repatriation of proceeds and set-off under loan agreements as exempt operations under clause 2 of article 19 of the Federal Law on Currency Regulation, the specified set-offs under loan agreements with non-residents should nevertheless fall under the general rule of clause 1 of article 19 of this law. The latter means that these would be operations for which Repatriation rules are still required
That said, Official Clarification of the Central Bank of the Russian Federation No. 11-OR dated 23 November 2022 allows one to make another conclusion. This approach is based on the argument that because the provisions of Decree No. 529 are technically valid until amendments to the Federal Law on Currency Regulation are introduced, and the amendments to the law (subclause 14 of clause 2 of article 19 of the Federal law on Currency Regulation) require the Government of the Russian Federation to establish a broader list of operations for the non-repatriation of proceeds, Decree No. 529 regarding the set-off under loan agreements remains applicable without any exceptions
In other words, these permissive rules of Decree No. 529 remain in legal effect until the Government of the Russian Federation does exercise its authority, and the resolution of the Government of the Russian Federation approving the relevant list enters into force, in which case the effect may be extended to the preceding time
. This is because it would be illogical to first introduce non-repatriation on loans, then to cancel it due to the entry into force of amendments to the Federal Law on Currency Regulation without detailing, and then to introduce it again under the resolution of the Government of the Russian Federation. Legally speaking, the replacement of one regulatory treatment (provisions of the Decree of the President of the Russian Federation
) should be recognised from the moment when the next legal treatment (the Federal Law and the corresponding Resolution of the Government of the Russian Federation
) is finalised taking into account the blanket rules.
As a conclusion we emphasise again that, according to the Central Bank of the Russian Federation, as set out in its Official Explanation No. 11-OR dated 23 November 2022, the rules of the Federal Law on Currency Regulation were not changed before the date of the issue of such official clarification as regards the relations regulated by Decree No. 529. This allows one to argue that set-offs under loan agreements with non-residents are currently allowed
Time will tell how the Russian currency control authorities will apply Central Bank Clarification No. 11-OR. However, given the dynamics of the changing legislation, Russian and non-Russian residents may already review the legal exposures of setting off claims under the loans issued and assess all related risks of repatriation requirements. That said, even in the existing uncertainties businesses should not miss an opportunity to consider a strategy permitting them to effectuate a set-off in case of a strong business need or the commercial expediency of the relevant transactions.