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As part of the government's ambitious economic reform programme, Russia has recently liberalized several key provisions of the Law on Currency Regulation and Currency Control, which has long been criticized as overly restrictive. The main changes came into effect in early July 2001, and further reforms are expected in the near future.

Exempt transactions

Russian resident companies and individuals may now freely conduct several new categories of transactions without obtaining a licence from the Central Bank. These include:

providing long-term trade credits for export sales of certain transportation vehicles, audio and video equipment, and military equipment, as long as the proceeds are repatriated to Russia within three years;

providing similar trade credits for exports of certain services (for example, in such sectors as construction), as long as the proceeds are repatriated to Russia within five years;

entering into insurance and reinsurance contracts in hard currency, for terms up to five years; and

opening foreign bank accounts in non-convertible currencies (such as Kazakh tenge or the currency of other former Soviet countries and trading partners) to facilitate payments for imported goods and construction services.

Private foreign investments

Resident individuals may invest in securities denominated in foreign currency, including direct investments overseas, in amounts up to $75,000 per calendar year. This provision should be of great interest to western brokerage and investment firms who wish to solicit Russian private clients. (There is still no authority regarding the status of existing pools of Russian private capital overseas, which are very substantial. These have generally accumulated since the late 1980s, in violation of Soviet and Russian currency controls. However, the government has begun to discuss the possibility of an amnesty, which would require such funds to be repatriated to Russia.)

Deadline for Central Bank approval

For the many types of transactions that still require a currency licence, the Central Bank is now supposed to process applications within two months. In the past, the approval process has often entailed significant delays, sometimes lasting many months.

Clarifications of existing law

Several technical changes seek to update the Currency Law. The definition of "currency values" (items treated as hard currency and therefore subject to regulation) has broadened to include securities, derivatives and debt instruments denominated in foreign currency. This codifies interpretations already applied in practice for some time. Similarly, the definition of "current currency transactions" (generally free from regulation) has been revised to include "non-trading settlements" (which includes such diverse items as court-ordered judgments, wages, notarization fees, and copyright royalties. Moreover, the government now has the right to add to the list). Another change has clarified the manner of calculating the 90-day period allowed for settlements under export-import transactions, in order for them to qualify as "current" transactions not requiring a licence: the 90-day period starts when the goods physically cross the Russian border.

Direct investment by Russian investors in the CIS

New Central Bank Regulation No.142-P allows certain unlicensed, direct equity investments in other countries of the Commonwealth of Independent States (CIS), in amounts up to $10 million. Generally, the new rule applies for the establishment of new companies, or purchases of at least 10% of shares in existing entities. This change should facilitate Russian investments throughout the CIS.

Expected future changes

In the near future, the government also intends to reduce the mandatory percentage of hard currency export proceeds that must be converted to roubles, from 75% to 50% or less. This requirement, in place since 1992, has limited the degree to which exporters could rely on their hard currency earnings as a hedge against inflation and currency risk. Despite substantial opposition from the Central Bank, we expect the new policy to be in place later this year.

Dmitry Melnikov and Brian Zimbler

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