Reforming Foreign Exchange Regulation and Foreign Exchange Control in Russia

Russia’s current foreign exchange regulations are largely rooted in Soviet period, when the state had the exclusive right to carry out transactions with foreign exchange assets and held the monopoly on foreign economic activity. Today, despite partial liberalization of foreign exchange regulations and control Russia still uses a host of substantial restrictions.

Unlike in foreign countries where foreign currency restrictions are applied at times of crisis and are temporary, in Russia foreign exchange control is permanent.

Overall, the Federal Law on Foreign Exchange Regulation and Foreign Exchange Control currently sets two serious restrictions that are not used in developed countries and that present challenges to foreign currency residents — both for natural persons and legal entities.

The first of these restrictions is the requirement to repatriate foreign currency revenues. Legal entities and sole proprietors must return funds that are due them under foreign economic agreements to authorized banks in Russia. The repatriation requirement decreases the competitiveness of Russian business compared to entrepreneurs from OECD members countries, where similar restrictions are not in place.

The second restriction is the exhaustive list of operations for foreign accounts. The permitted list is relatively small: it comprises six permitted transactions for all categories of currency residents, twelve for natural persons, and only five for legal entities. This makes it very difficult for Russian companies and citizens to use foreign accounts. At the same time, foreign exchange control bodies and agents have no way of monitoring compliance with the restrictions on foreign accounts due to the lack of effective instruments for international exchange of information. Beyond this, there are other problems that increase pressure on currency residents.

Given the problems described above, which are caused by needless restrictions for Russian citizens and legal entities, experts of the Center for Strategic Research put forward a set of proposals aimed at improving the situation.

The first stage involves eliminating the key barriers of foreign exchange regulations that inhibit the foreign economic activities of Russian entrepreneurs. This will require implementation of the following measures:

  • To draft amendments to the legislation aimed at abolishing the repatriation requirement and setting an open regime for using foreign accounts.

  • To draft proposals to repeal the prohibition on foreign exchange transactions between residents and to introduce the prohibition on using foreign currency as legal tender in Russia into the Civil Code of the Russian Federation.

  • For ensuring safety of cross-border capital flow to extend in accordance with FATF standards the list of unusual transactions in Order No. 103 of the Federal Service for Financial Monitoring “On Approving Recommendations to Develop Criteria for Uncovering and Determining the Signs of Unusual Transactions” issued in 2009. Specifically, to include cases where shipped goods meet the definition of goods with an “increased risk of money laundering,” when a transaction entails the use of letters of credit that have undergone multiple corrections or prolongations, etc.

  • To develop information cooperation between customs bodies and financial intelligence units in Russia by ensuring rapid exchange of information in case of possible crimes and facilitating mutual access to databases of the Federal Customs Service and the Federal Service for Financial Monitoring.

  • To draft proposals for transferring the rules on notifying and reporting on foreign accounts into the Tax Code of the Russian Federation for the purposes of tax control (for tax residents), as done in the OECD member states.

At the second stage, in 2019–2020, it would be possible to abolish the reporting requirement for entities with accounts in countries that automatically exchange information with Russia under the CRS MCAA. Another proposal for the second stage is to completely repeal the Federal Law on Foreign Exchange Regulation and Foreign Exchange Control while transferring needed nomenclature to other regulatory legal acts.
The proposed transformation of foreign exchange regulations will make it possible to abolish outdated foreign exchange restrictions that have already become remnants of the past in all developed countries. This will reduce costs for Russian economic agents and promote increased economic activity in Russia.