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. Last Updated: 07/27/2016

BUSINESS AND THE LAW: Capital To Fly Around New Rules




A recent Central Bank order -- Decision No. 519-U, dated March 22 - has been largely criticized for preventing the relatively few Russian companies that still have the means to import goods to do so. Indeed, the decision - even taking into account the "explanation" contained in Instruction No. 543-U, (April 14) - requires a Russian importer who wants to provide prepayment under an import contract for goods to first place an amount equal to the prepayment on deposit. Such sums will hardly be available to even the wealthiest of Russian importers. As deferred payment imports have become very rare in Russia since Aug. 17, the decision has been considered, in effect, to prohibit imports altogether. On the other hand, some experts have welcomed the decision from an economic standpoint as a further step toward preventing capital flight. In reality, however, the decision is a short-term measure that will only temporarily limit the demand for currency in Russia and provide one more non-tariff barrier to the import of goods.


It is critical to bear in mind that the preferred path of capital flight in Russia is, was and will continue to be the export of goods at understated prices and the import of services, both of which remain almost unregulated. Therefore, the above decision and other restrictions on the import of goods will have little impact, if any, in this critical regard.


It is also questionable whether the decision will increase compliance with Russian currency law, not only because the Central Bank's supervision of currency transactions is reportedly more partial than ever, but also because the very legality of the decision is questionable. As court practice already exists stating that the importer is not liable for any violations of the import contract by the exporter that lead to infringements of currency law, the deposit will rarely be available in order to satisfy claims for penalties against the importer.


Most important, however, it must be recognized that, generally speaking, pre-payments and deferred payments - which normally exist as opposing methods - in fact become identical instruments for all intents and purposes in an economy in which bank guarantees are available. Therefore, rather than making a pre-payment, a Russian importer can instead make a deposit at a reliable Russian bank, which in turn can provide a payment guarantee to the foreign exporter, thereby giving the exporter the required security of payment. A slightly more complicated possibility would be to have the importer finance the deposit with the exporter's performance bond. Thus, the performance bond would be granted to the importer's bank, which, on the basis of the performance bond, would credit the importer the amount needed for the deposit, which could then be remitted to the bank. Should the exporter fail to perform, the bank would retain the deposit, and therefore there would neither be any additional credit risk nor any higher performance guarantee for the importer.


The instruction has now relieved the deposit requirement in similar cases, in which a guarantee by the exporter is received; however, this guarantee has to come either from a reliable bank or from a number of specifically cited banks. In spite of the fact that a list of these particular banks has been included by the Central Bank, thereby suggesting that they comply with currency law, it is nevertheless bad practice to grant certain banks a de facto seal of approval over others with the same level of credibility.


Finally, in those cases in which the adoption of such above-noted schemes proves to be too cumbersome, only a sale through the Russian subsidiary of the foreign exporter would provide relief. In this case, the payment between the foreign exporter and the Russian importer can be deferred, although the ultimate Russian end-user will still be required to pay prior to delivery.


As a consequence, it appears that, apart from the relief to the ruble exchange rate caused by the confusion created by its introduction, the decision is unlikely to have any material effect other than to provide new business for the foreign-owned Russian banks and/or their advisers. Taken in the context of other recent currency-related measures, it seems that the primary purpose of this decision is to assist the Russian government in meeting its obligations that come due over the next few months by temporarily decreasing the demand for currency. This of course is a short-term fix, which will not affect the problem of capital flight which has for so long served as a drain on the nation's economy. Indeed, administrative measures to resolve such an issue are counter-productive, as only the existence of a stable investment environment will succeed in attracting - and keeping - capital within Russia.


Max Gutbrod is a partner in the Moscow office of Baker & McKenzie.