Prsentationsvorlage RZB

1
Effect of foreign exchange regulations on
Russian banking sector
October 2005 Moscow
2
History

• 1991 the Directive of the Central Bank of USSR
• On basic provisions of regulation of foreign
  exchange operations on
• the territory of USSR
• Law ? 3615-1 dated 09.10.1992 On currency
  regulation and
• currency control - currency control functions
  imposed on banks
• 1994 Central bank Instruction ?19
• 1995 Central Bank Instruction ?30
• 1998 Law 192-FZ On immediate measures concerning
  budget and
• tax policies
• 2004 Law ?173-FZ On currency regulation and
  currency control

3
The new Law on Currency Regulation and Currency
Control

• The new Law published on December 17, 2003
• came into effect as of June 18, 2004 (except for
  article 12 related to opening accounts abroad by
  Russian companies)
• amendments to the Law came into effect as of July
  1, 2004 (customs authorities granted status of
  currency control bodies...)
• starting from June 19, 2005 Russian companies may
  open accounts abroad
• The new Law announced January 1, 2007 an end of
  limitations date.

4
New principles of foreign exchange regulations

• Ambiguous issues are interpreted in favor of
  residents and
• non-residents (individuals or legal
  entities)
• based on a new principle everything that is not
  prohibited
• by the law is allowed
• Priority of economic measures over administrative
• Elimination of practice of individual Central
  Bank permissions
• Closed list of operations that can be carried out
  
• under special regime
• Deadlines for elimination of the existing
  restrictions

5
Major changes

• Terms for export/import settlements increased
  from 90 to 180 days
• Exemption from obligatory sale for servising debt
  under foreign loan
• ( obtained from OECD, FATF residents) with the
  term over 2 years
• Russian individuals may invest into foreign
  securities up to 150.000
• Liberalized procedure for FCY purchase and taking
  cash
• abroad (for individuals)
• Limitations on settlements for real estate has
  been removed.

6
Disadvantages for Russian banks

• Obligatory sale requirement does not allow
  Russian exporter to effect
• assignment of export proceeds in favor of
  Russian bank -lender
• (exemption exists only for foreign loans from
  OECD, FATF countries)
• Limitation of foreign currency payments between
  residents significantly
• complicates accounting schemes used by Russian
  banks for settlements
• of transactions with foreign securities
• Lack of legislation regulating domestic
  transactions with derrivatives and
• risk of imposition of compulsory reserve
  requirement in case of sale/purchase
• of FCY undermine development of this market.

7
Disadvantages for Russian banks

• Limitations imposed on settlements of
  transactions with domestic securities
• between a Russian bank and a non-resident
  customer result in decrease of
• these operations, when Russian bank acts as a
  broker.
• Requirement for compulsory monetary reserves,
  which applies to
• rouble loans granted by Russian banks in favor
  of non-resident clients
• makes this product unattractive for clients
• Mandatory control over credit card transactions
  with presentation of justifying
• documents (was in force until April 2005) and
  limitation of settlements with
• the use of credit cards, issued by a Russian
  bank to a non-resident card-
• holder, is the major obstacle for development of
  this product in Russia.

8
Opening of bank accounts abroad

• During the first year after enforcement of the
  Law 173-FZ
• former procedure for account opening was valid
  (established by Directive
• of the Central Bank 256-P ).
• Starting from 19.06.05 up to 01.0.07
• Russian companies may open accounts with banks in
  OECD and FATFmember countries (although the list
  of transactions allowed through these
• accounts is limited)
• Russian companies may open accounts with banks in
  other countries
• under condition of preliminary registration with
  tax authorities.
• Important notice
• Banks will not execute transfer to such an
  account without documentary
• proof by the customer that he has registered
  reserved account with tax
• inspectorate.

9
Types of special accounts (instructions 115-?
and 116-?)

• Special rouble accounts for non-residents (C, A,
  O, B1, B2)
• Special foreign currency accounts for residents
  (P1, P2)
• Special custody accounts for non-residents to
  register internal
• securities (A, O, C)
• Special custody accounts for residents to
  register foreign securities
• (P2, P1)
• Special broker accounts (opened by resident
  broker companies)

10
Non- residents special accounts

• Accounts types
• ? payments for bonds issued in Russian
  Federation
• ? payments for shares/equities
• ? payments for promissory notes
• B1 obtaining loans from Russian resident in
  roubles, settlements for domestic securities
• B2 providing loans in roubles, settlements for
  domestic securities.

11
Residents special accounts

• Accounts types
• ?1
• obtaining loans in foreign currency from
  non-residents
• raising capital by issuance of eurobonds,
  promissory notes in foreign currency
• settlements for foreign securities, which are not
  booked on special custody accounts.
• ?2
• providing loans to non-residents in foreign
  currency
• investments into foreign securities
• payments for foreign securities in other cases
• for legal entities

12
Bank risks

• Bank as a currency control agent is responsible
  for proper execution
• of these functions and may face penalties in the
  amount of transaction
• processed. At the same time Law 173-FZ
  stipulates that banks are
• liable for misuse of its powers by conducting
  currency control and for
• abusing clients rights by fulfilling these
  functions. Which creates rather
• dubious situation for a bank in circumstances of
  ambigues issues or
• lack of legislation.
• Bank may face penalties for non-compliance with
  its duty to reply to
• numerouse requests of customs, tax and other
  authorities in terms of
• observing established deadlines and correctness
  and completeness
• of the information provided.

13
Consequences

• Considerable rise in risks associated with
  processing of foreign currency
• settlements for customers
• Unjustified growth in paperwork for a bank and
  for a customer
• Increase in processing costs for a bank.

14
Improvements suggested

• Unification of information flows between currency
  control authorities and
• banks in order to improve monitoring, control
  and analysis functions
• Standardization of procedures for control
  applicable to different types of
• currency transactions
• Delegation of major control functions over
  foreign trade transactions with
• goods to customs authorities
• Banks should concentrate on anti-money laundering
  procedures and
• further implement those procedures into practice