CURRENCY AND EXCHANGE CONTROLS IN THE RUSSIAN FEDERATION

• Jurisdiction: United States

International Resources Law II: A Blueprint for Mineral Development
(Feb 1995)
CHAPTER 9B
CURRENCY AND EXCHANGE CONTROLS IN THE RUSSIAN FEDERATION
Elena A. Kuryatnikova
Holme Roberts & Owen LLC
Moscow, Russia

I. OVERVIEW

The process of perestroika as envisaged by former President Gorbachev has dramatically affected the way international trade and transactions are now conducted in the Russian Federation. Previously, only state organizations were authorized to engage in such transactions. Each such organization was required to maintain accounts with, and conduct all international transactions through, the Bank of Foreign Trade of the U.S.S.R. (later renamed the Bank for Foreign Economic Activity). Access to foreign exchange was regulated by the state planning agencies, mainly GOSPLAN, the Ministry of Finance and the State Bank. As a result, the country's foreign exchange resources were allocated to state organizations on an as-needed basis (as determined by the central government).

In the early 1990s, however, a number of fundamental reforms were adopted that radically transformed the ability of individuals and private entities to engage in international transactions in the former U.S.S.R. The most significant of these reforms was the decentralization of control over foreign economic activity. In March 1991, the U.S.S.R. law "On the Regulation of Foreign Exchange" was enacted and changed the centralized system of foreign exchange allocation that previously existed. Foreign currency exchange controls in Russia would never be the same.

Presidential Decree No. 213 "On Liberization of Foreign Economic Activity in the Territory of the RSFSR" dated November 15, 1991 ("Decree No. 213"), further liberalized and decentralized the foreign exchange regime of the former U.S.S.R. by permitting individuals and private commercial entities to engage in international trade and transactions. First, Decree No. 213 stated that all duly registered legal entities of the Russian Federation were allowed to engage in foreign economic activity without special registration or permission of government authorities (certain of these rights subsequently were sealed back as discussed below). Second, private commercial banking and financial institutions were allowed to participate in currency operations, including opening foreign currency accounts on the territory of the U.S.S.R. Gone were the days when access to foreign currency and participation in foreign trade was limited to a select group of state organizations.

After the collapse of the U.S.S.R. and the creation of the Russian Federation, the Central Bank of Russia took over the functions of the U.S.S.R. State Bank. The role of the Central Bank as the principal regulator for currency and currency-related issues was firmly established by the Russian law "On Currency Regulation and Currency Control" dated October 9, 1992 and effective January 1, 1993 (the "Currency Law"). The Currency Law delegated to the

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Central Bank primary responsibility both in the adoption of currency and exchange-related policies and in the implementation of regulations in support of those policies. Thus the Central Bank has become both policy-maker and regulatory watchdog, though each of these functions is, to a certain extent, shared with other government agencies and entities.

II. EXCHANGE CONTROL POLICY AND REGULATION

The principal responsibilities of the Central Bank, as enumerated in the Currency Law, are to regulate the circulation of currency within the territory of the Russian Federation, to safeguard the stability of the ruble, to ensure a single federal monetary and credit policy, to arrange interbank settlements, to protect the interests of bank depositors, to supervise the activities of commercial banks and other financial and credit institutions, and to perform operations related to foreign economic activities.

Though the Central Bank has primary responsibility for developing these policies, in practice a number of other domestic agencies have significant input. Both the legislative and executive branches of the government work together to develop a single currency control policy for the Russian Federation. The joint role of Parliament and the Executive branch on certain currency policy matters stems from the Currency Law's ambiguity on a number of jurisdictional issues. The Currency Law provides, for example, that Parliament establishes the rules for the management of the state's foreign currency reserves, yet the authority for changing the rules on mandatory sale of foreign currency earnings from export operations rests with the President.

Working together with various Russian government officials and International Monetary Fund (IMF) economists, the Central Bank develops policies designed to stabilize the domestic currency and promote economic conditions that will facilitate trade and investment. In developing these policies, the Central Bank also must consider its international obligations under bilateral and multilateral investment agreements to which it is a party. Existing official agreements fall into three categories: (i) foreign investment treaties; (ii) intergovernmental credits; and (iii) trade agreements. Under the Constitution, these international agreements supersede Russian legislation in the case of contradiction. As a result, these agreements impose significant limits on the ability of lawmakers to enact currency-related legislation.

During the past three years, Russian policymakers have seen capital flight as one of the key economic problems facing the Russian Federation. Most policymakers attribute the propensity of Russian citizens to invest and protect their capital abroad to Russia's history of a centrally planned economy and nationalized capital and the consequent lack of domestic confidence in the Russian economic

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system. This problem has been especially acute during the early stages of Russia's transition to a market-oriented economy because domestic policymakers have not yet been able to establish the level of economic stability necessary to convince the Russian people, particularly the new Russian industrialists who have acquired very substantial amounts of capital, that it is safe to reinvest and hold capital in the Russian Federation. Reversing capital flight continues to be a top priority of Central Bank officials.

As it does with respect to the formation of policies, the Central Bank develops and implements currency and exchange control regulations together with other governmental agencies including the Ministry of Finance, the Ministry of Economic Relations, the Federal Commission of the Russian Federation for Currency and Export Control, the State Tax Service, and the State Customs Committee. For example, the Ministry of Finance and the Foreign Economic Relations Ministry supervise compliance with the regulation of foreign currency transactions that are subject to...