Install

Get the latest updates as we post them — right on your browser

. Last Updated: 07/27/2016

Legal Ways to Pass On the Buck

It's no secret here that most Russians and expats prefer to receive their payment in dollars. And judging by the wide publicity new U.S. $100 bills received here earlier this year, many foreigners and a decent number of Russians are holding and earning greenbacks.


Russian Central Bank Letter No. 107 in Article 12 mandates that Russian nationals must be paid in rubles for employment services which are performed within the territory of the Russian Federation. However, as almost every foreign business here knows, Russian employees generally prefer to be paid in U.S. dollars to avoid the erosion of real income wages which comes with the ruble's ongoing devaluation.


This is often accomplished using a so-called debit card system. Under this type of program, the company sells hard currency in order to purchase rubles to pay the employee; the company then pays a second conversion fee on behalf of the employee to repurchase the dollars from the ruble salary, said Steve Green, a tax manager with Price Waterhouse. The bank opens an account on behalf of each employee and issues each one a debit card, on which they can draw the converted amount.


"The practical result of this process is that the employee obtains payment in hard currency, and the bank benefits from having made two currency transactions," said one Western attorney, who asked not to be identified.


Central Bank Letter No. 107 further states that resident enterprises, institutions and organizations cannot pay hard-currency salaries to non-residents on the territory of the Russian Federation.


This law, however, does not require that foreign nationals be paid in rubles on Russia's territory if they are employed by a non-resident entity; nor does it limit the ability of a foreign national employed by either a resident or non-resident entity to be paid off-shore in hard currency.


For example, a Russian or foreigner can receive his salary in dollars if the non-resident entity wires money from an offshore bank account to his or her bank account in Russia. The question here boils down to where the payment actually takes place. "This is an important exception where you can pay in hard currency [in Russia]," said the Western attorney.


Another way foreign companies operating here can pay their employees in dollars is by setting up representative offices which do not engage in any commercial profit-making activity. The law allows such representative offices to make hard-currency salary payments but the practice has found that most of these offices are engaging in commerce.


"It's probably one of the most widely disregarded laws in Russia," the Western lawyer said. He noted, however, that the Russian authorities disregard it as well since there are no sanctions for entities that violate this rule.


For employers who have agreed to provide their employees with a stable, dollar-denominated payment at the end of each month, there are a number of difficulties. Many employers take on the bureaucratically labyrinthine burden of paying income tax on their employees' behalf, calculating a gross salary in rubles that will result in a stable, after-tax net salary, said Price Waterhouse's Green.


In order to guarantee a stable net salary in dollar terms, the employer must, in effect, take into account three separate deductions -- ruble devaluation, currency conversion fees and income tax rates.


"Until people have more confidence in the ruble, salaries are going to be denominated in hard currency," he said.


Green estimated that today only 25 to 30 percent of Western employers are still paying their employees on a guaranteed net basis to keep the agreed dollar salary in line. The rest, he said, are paying gross salaries, in rubles or dollars, and relying on the employee to figure and pay income tax individually.


But the continuing devaluation of the ruble, its limited external convertibility and the instability of Russia's domestic banking system still make it exceedingly unattractive for most foreign nationals to work in Russia if the ruble-only payment rule was strictly enforced, legal experts say.