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. Last Updated: 07/27/2016

A Cash Regulation Parody

The trouble with Russian foreign exchange regulations is that they are not Russian, often don't relate to foreign exchange and barely constitute regulations.

Foreign exchange transactions in Russia continue to be governed by Soviet-era instructions of the State Bank of the defunct Soviet Union.

These apply even to transactions unrelated to foreign exchange payments, such as the use of rubles by foreigners, and the purchase and sale of gold and gems.

Finally, the rules governing foreign exchange transactions resemble a set of reticulated regulations as much as Moscow's Garden Ring resembles an autobahn.

One of the challenges posed for foreign investors by the hodge-podge of foreign exchange rules is to how pay for Russian securities or other investments in Russia.

The Foreign Investment Law permits payment to be made in foreign currency.

Alternatively, foreign investors can open special ruble accounts in a Russian bank and use them for acquiring securities and other investments in Russia.

These accounts were introduced in August 1993 to encourage foreign investment. For the unwary investor, however, ruble investment accounts, or simply "i-accounts," contain many pitfalls.

First, the accounts are not easy to administer from abroad, so a representative must be appointed in Russia.

Indeed, Central Bank rules envisage the use of appointed representatives to administer i-accounts.

At the same time, under tax regulations, the presence of an individual representing a foreign company is sufficient for creating a taxable permanent establishment of that company in Russia.

The real deathblow, however, was delivered to the i-accounts by the Central Bank only in September with the promulgation of little-noticed amendments to the rules governing i-accounts.

One of these amendments states that money cannot be repatriated from the i-account without a letter (spravka) from the tax inspectorate confirming that all taxes in Russia have been paid by the account holder.

Of course, no honest tax inspector would give such a spravka without a full audit of the account holder's activities.

And, even then, the tax inspectorate's regulations do not require it to issue a spravka stating that all taxes have been paid.

A dishonest tax inspector, on the other hand, might be persuaded to issue a spravka for a fee.

The brave souls undaunted by the prospect of obtaining a spravka should be warned that i-accounts are by law non-interest bearing.

So, in the time it takes to collect the magic spravka, the value of the monies to be repatriated could be slashed in value.

While i-accounts can be very useful for any foreign investors making strategic acquisitions that do not require earnings to be repatriated, for financial investors the i-account is a nightmare.

Leonid Rozhetskin is a graduate of the Harvard Law School and a native of St. Petersburg, now in private practice in Moscow.