Currency control restrictions and advance payments

by Valeria Khmelevskaya

The Russian legislation for currency regulation and control provides for so-called “repatriation” liability, i.e. obligation for Russian companies to secure the receipt of currency earnings from non-residents to the Russian bank accounts in certain cases. While originally the vast majority of foreign trade contracts fell within the scope of the “repatriation”, it has since been largely cancelled for Russian exporters. However, obligations to return advance payments made by Russian companies for goods that have not been ultimately delivered/imported, for services and works that have not been provided or completed are still applicable.

Generally, the respective advance payment amounts are to be returned within certain time period in such cases. Failure to perform the above obligation may result for a Russian company in significant fines, e.g. up to 30% from the non-returned amount for foreign currency contracts. Moreover, when the non- returned amounts exceed RUB 100,000,000 a company executive responsible for the violation may be even held criminally liable.

Following the imposition of sanctions on Russia, both the deliveries of goods to Russia and the refunding advance payments to Russian bank accounts can prove to be challenging. Currently, there are a lot of cases when termination of the contract occurs, whereby due to the lacking possibility of contractual performance the payback of advance payments in full is awaited, which in conjunction with “repatriation” liability leaves no room for retaining the respective sum abroad, e.g. for covering any damages of the supplier or offsetting the respective sums against any outstanding obligations towards the supplier.

Many companies come across a hard choice either to undergo the risk connected with for omission of repatriation liability or to claim the foreign partner in court without knowing the exact chances to succeed. In any case the liability risk might be mitigated if the company undertakes any available measures of legal remedy regarding the amounts of advance payments, e.g. reclamations, lawsuits. Such approach may improve the chances of challenging the application of liability measures in court.

At the same time measures aimed at moderating the currency control legislation have been taken lately, aimed primarily at supporting Russian exporters and importers. Namely, starting from July 2022, the fines were lowered for RUB contracts (up to 5% of the non-returned amount; previously – to 10%).

When it comes to the advance payment returns being rendered non-feasible due to the sanctions, the amendments were adopted to ensure that currency violations committed during the period between 23 February 2022 and 31 December 2022 and caused by foreign sanctions will not be punished. It is, however, not clear as to what exactly constitutes “being caused by sanctions” and what stance the courts will take. Clarifications in this regard are to be expected.

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Auditing, Reporting & Compliance Corporate Governance & Compliance Russia KBK