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The Central Bank of the Russian Federation (CBR) recently adopted new currency regulations affecting capital contributions and long-term loans in hard currency, as summarized below. The new provisions appear intended to clarify and simplify Russian currency legislation, but in some cases they may have the contrary effect of delaying or complicating cross-border investment and financial transactions. In addition, they strengthen the involvement of the CBR in even the most routine transactions, increasing the bureaucratic burdens on foreign investors and lenders.

Capital contributions in hard currency

In July 1997, the Central Bank issued new regulations under Order No. 482, governing foreign investors' contributions to the charter capital of Russian legal entities. The regulations clarify the procedures for making equity contributions in cash, which must be effected in roubles through a special type 'I' (for investment) rouble bank account opened by the foreign investor with a Russian bank (if desired, such a bank account may be opened on a temporary basis, purely for the purpose of completing the cash contribution). Opening the account is itself a relatively cumbersome procedure, requiring the investor to submit a package of documents to the bank and arrange for notice to the tax authorities. A corresponding hard currency account is also opened, to hold the investment funds before conversion to roubles.

Within two business days after the 'I' account is opened and the funds have been converted to roubles and deposited, the bank submits an application to the appropriate local branch of the CBR. The CBR must process the application within 10 working days; it must approve the application unless certain limited grounds apply (eg, if the application contains false information). If the application is approved, the CBR issues a registration certificate for the investment. Within five working days of receipt of the certificate, the bank must release the funds from the 'I' account for the desired investment transactions.

The CBR apparently intends these procedures to be treated as routine, and not to create further obstacles to equity investment in Russia. In practice, the new system could create delays of 10 to 15 working days or more before the closing of capital contributions. Such delays did not exist previously, and may become a real hindrance for foreign investors. They will also considerably increase the costs incurred by Russian banks in maintaining and operating 'I' accounts for their clients.

In addition, the regulations have raised questions about whether the CBR will continue to issue licences for cash contributions in hard currency, which were formerly available on a routine basis (although often with substantial delays after a request). We have consulted with officials of the CBR about this issue, and have been advised informally that such licences may still be obtained on a case-by-case basis, but stronger justification and supporting documentation may be required than in the past. Previously-issued currency licences for capital contributions should not be affected.

Hard currency loans for terms greater than 180 days

In October, the CBR issued Order No. 527 (published and effective on November 5 1997). The Order approved new regulations governing hard currency loans by non-residents to residents for periods that exceed 180 days. Previously, all such loans required individual licences from the CBR, which were only granted after a potentially rigorous application and review process. Under the new regulations, qualifying loans may be made under a streamlined 'registration' procedure, which will nevertheless require close coordination between the resident borrower's bank and the appropriate local branch of the CBR (the regulations do not apply to certain loans, including those made by the IMF, or to normal trade financing in connection with import-export transactions).

Under Article 1.4.2, the registration procedure is available for loans of US$100 million or less, bearing interest at not more than six-month Libor plus 5%. Expenses payable to the lender may not exceed 3% of the loan amount, and the loan may not be connected with other "movement of capital" transactions that require a CBR licence (accordingly, Article 1.3.4 provides that loan proceeds may not be used for the purchase of securities or real estate, among other restrictions).

The regulations explain the procedure for registration of loans in excruciating detail. If a resident borrower wishes to accept a hard currency loan for a term of more than 180 days, it must first submit the loan agreement and other documents to a Russian bank that holds a general licence for currency operations. Within 10 calendar days, the bank must determine whether the loan qualifies for the registration procedure, or whether a CBR licence will be required. If the bank determines that the registration procedure is available, then it sends the documents to the appropriate local branch of the CBR for review. Within 10 working days (a period which may be extended if the CBR find sufficient cause), the CBR completes its review and, if it agrees with the bank's conclusion, registers the loan transaction. Upon such registration, the borrower may finally proceed with the loan.

Amendments to qualifying loan agreements must be registered in the same fashion. Loans previously made for periods of under 180 days may be extended beyond this term under the registration procedure, provided they bear interest at not more than six-month Libor plus 5%. Loans secured by pledged assets of Russian residents do not qualify for the registration procedure, and must be licensed. Further, the CBR may refuse to issue a licence if the value of the pledged collateral is more than twice the loan amount.

It remains to be seen how well the new registration procedure will work in practice. Much depends on its proper implementation by commercial banks, who are increasingly being loaded with administrative and regulatory responsibilities by the tax, currency and banking authorities.

Brian Zimbler

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