On 1 July 2021, the requirements of repatriation of currency earnings for Russian non-commodity exporters under certain types of obligations were cancelled under Federal Law No. 223-FZ* (the “Amendment Law”).
Before the Amendment Law came into force, all Russian exporters were at risk of receiving administrative fines when failing to comply with obligations to repatriate their currency earnings within the time limits set down in the relevant contracts. To avoid fines, exporters had to take all possible measures to return foreign currency proceeds to Russia within the prescribed time frame and prove to supervisory authorities that there was no unlawful intent when concluding the transaction.
The adoption of the Amendment Law is expected to reduce the risks for and administrative burden on Russian businesses when entering into foreign trade transactions.
Operations subject to the new rules
Transactions to non-residents are now exempt from repatriation requirements if their terms provide for the transfer of goods, the performance of work or the provision of services, or the transfer of information and IP objects (including exclusive rights to such objects).
The Amendment Law applies to foreign trade contracts between residents and non-residents in foreign currency concluded from 1 July 2021 or before that date if the obligations under these contracts were not fulfilled on that date.
But this law does not affect settlements under the following foreign currency obligations with non-residents, which remain subject to repatriation requirements, namely:
- loan agreements;
- advance payments on import contracts whose obligations have not been fulfilled;
- obligations whose subject matter is commodities and other goods (e.g. fish, gems, wood). The Amendment Law provides a specific list of goods subject to transactions for which repatriation rules still apply. This list is based on the unified Commodity Nomenclature of Foreign Economic Activities of the Eurasian Economic Union.
The new rules were adopted as part of the gradual cancellation of repatriation requirements. Earlier, similar changes applied to certain categories of foreign trade commodity contracts concluded in roubles (see our previous eAlert on this topic for more detail).
The Amendment Law has also introduced correlative amendments to Article 12(2) of the Currency Control Law*, which allows residents to credit proceeds from foreign trade contracts (for which repatriation requirements have been cancelled) to accounts in banks outside Russia.
Before the amendments were introduced, failure to comply with the requirements of Article 19 of the Currency Control Law* could result in an administrative fine amounting to 5% to 30% of the funds not returned to Russia under liabilities in foreign currency. Fines were imposed on Russian exporters in each case of non-performance of a foreign trade contract and failure to return foreign currency proceeds to Russia (if they or their counterparty was at fault for the failure). With the adoption of the Amendment Law, the fines for failure to repatriate proceeds under the above obligations no longer apply to non-commodity exporters.
In addition, the adoption of the Amendment Law may have a positive impact on Russian exporters who previously violated rules but have not yet been subject to an administrative fine resolution. In such a case, they may challenge the imposition of a fine based on the fact that the Amendment Law removes an obligation where non-compliance will result in an administrative fine.
This partial cancellation of repatriation requirements represents a new and very positive step forward for the business community, but it is too early for Russian exporters to let their guard down since this relief does not completely cancel currency controls on foreign trade transactions.
The Amendment Law provides that, for currency control purposes, the Central Bank of the Russian Federation will monitor the performance of foreign trade contracts for specific residents. In particular, the Amendment Law gives the Central Bank the right to approve a list of residents who will be required to report on the receipt of funds under foreign trade transactions, or any other performance or termination of obligations of non-residents, as well as assets and liabilities denominated and/or payable by such residents in foreign currency in favour of non-residents. In fact, little will change for resident parties to foreign trade agreements included in such lists, and their administrative burden for cross-border transactions will remain the same.
Firstly, companies affected by the changes should thoroughly check:
- which of their foreign trade transactions are still subject to repatriation requirements;
- which repatriation rules have been cancelled; and
- whether alternative settlement arrangements with foreign counterparties may be implemented.
Secondly, even if repatriation rules have been cancelled for export transactions in foreign currency, Russian exporters have an obligation to ensure proper performance or termination of obligations under such transactions by all means allowed under Russian law. Failure to comply with this obligation may result in an administrative fine for the exporter who is a Russian currency resident.
Thirdly, Russian exporters who plan to transfer proceeds to the accounts of their foreign branches and representative offices opened with foreign banks should bring these transactions in line with the Amendment Law and confirm with their bank’s currency regulation and control department that these transactions are now allowed. This is because certain provisions of Part 5 of Article 12 of the Currency Control Law* governing credit transfers to foreign accounts of foreign branches and representative offices remain unchanged and do not match certain provisions of the Amendment Law. We hope that this situation is only an indication of an inaccuracy in legal technique. It is too early to say whether, in practice, the supervisory authorities will interpret this inaccuracy in their favour. In any case, only law enforcement practice and/or official clarifications on this matter will make the situation crystal clear.
For further information, please email the authors or your usual contact at CMS Russia.
* In Russian