LeBoeuf, Lamb, Greene & MacRae Moscow
A new central bank regulation allows foreign investors to make equity contributions to the charter capital of Russian companies in hard currency, without first obtaining a currency licence. This represents a major change in central bank policy, which since at least 1997 had generally required contributions to be made in rubles, through a type "I" bank account. As a result of the new regulation, foreign investors may freely invest hard currency into Russian subsidiaries and joint venture entities. Maintaining the invested funds in hard currency will provide the Russian recipients with a valuable hedging mechanism against currency devaluation and inflation. The new regulation will also somewhat reduce the time and procedures required for a foreign investor to implement cash contributions to a Russian company.
The new policy appears in Central Bank Directive No 660-u, which was published on October 13 1999, and became effective from that date. It states that Russian resident companies may accept charter capital contributions in hard currency, without first obtaining a currency licence (as otherwise required under Articles 1.10 and 6.2 of the Law on Currency Regulation and Currency Control). Similarly, Russian resident companies may accept hard currency contributed under a simple partnership arrangement pursuant to Chapter 55 of the Civil Code (also known as a joint activity agreement). Under Paragraph 2 of the Directive, invested funds may only be returned to a foreign investor in rubles (for example, pursuant to a reduction in capital or liquidation of the Russian company).
The Directive should enable foreign investors to bypass the cumbersome procedures for investing in rubles through an "I" account, which tend to delay registration of new Russian companies. Such procedures may also increase exposure to the risks of currency devaluation, since the invested funds cannot be used during the registration process. The use of "I" accounts will remain important for certain other purposes, including purchases of Russian shares on the secondary market and repatriation of dividends and proceeds from sales of Russian shares.
Nevertheless, as with all new central bank regulations, caution should be exercised in acting on the basis of the new Directive. We would expect common practices and procedures to develop over the next few months, as Russian banks, the company registration authorities and central bank officials gain experience with the new policy. On balance, we expect the new Directive to make it easier to invest in Russia.