Additional countermeasures to ensure Russia’s financial stability

Key restrictions

On 1 March 2022 the Russian President signed a decree [1] on additional temporary economic measures to ensure Russia’s financial stability (the “Decree”).

The document sets up a special procedure for residents [2] to conduct the following transactions with foreign persons connected with countries that are taking unfriendly actions against Russia, effective 2 March 2022:

• transactions extending credits in Russian roubles and loans in Russian roubles and foreign currency;
• transactions resulting in the transfer of securities and real estate to foreign persons;
• a ban on currency residents crediting foreign currency to their own accounts (deposits) opened with banks outside of Russia and other foreign financial institutions (for example, crediting dividends to foreign brokerage accounts);
• a ban on transferring money via foreign payment service providers without opening a bank account (e.g., PayPal, Cardpay, Alipay).

Now, these transactions will need to be authorised by the Governmental Commission for Control over Foreign Investment in the Russian Federation [3], and securities transactions may be made in on-exchange trading based on permits from Russia’s Central Bank by agreement with the Ministry of Finance and containing the terms of the transactions.

The decree also extends to:

• transactions with foreigners from any other states that acquired real estate or securities from “unfriendly” persons after 22 February 2022;
• any persons controlled by “unfriendly” foreign persons “regardless of where they are registered or have their principal place of business”;

The transaction procedure introduced by the Decree does not apply to transactions to which Russia’s Central Bank and government authorities are parties.

It is anticipated the bans will be effective regardless of the governing law chosen by the parties to the transaction. In this sense, a choice of English law, for example, cannot keep Russian law provisions banning the performance of such types of transactions from being effective.

This procedure for getting approval for “sanctioned” transactions was not invented by Russian law. The prior authorisation procedure was borrowed from US and European sanctions programmes. In the United States the authorities are the Office of Foreign Assets Control (OFAC) and the Bureau of Industry and Security (BIS).

Regulatory gaps

There are number of gaps in the Decree that presumably should be interpreted in economic agents’ favour.

• The Decree does not apply to transactions involving equity interests in LLCs because the Decree mentions only “securities”. The same is true of financial derivatives (forward and futures contracts) not involving securities.
• It is still a matter of debate whether organisational agreements involving securities (options, preliminary and framework agreements) may be made. They don’t immediately result in transfer of ownership but are for entering into a main contract in the future. The law enforcement authorities could take different positions, depending on whether the agreements are considered as having been made under conditions precedent (becoming effective not before the restrictive measures imposed by the Decree are lifted), up to declaring them void on the basis of Article 168(2) or Article 169 of the Civil Code of the Russian Federation. We don’t rule out the possibility that this issue could be resolved differently in each specific case. In addition, the Decree does not literally distinguish between Russian and foreign assets, although, in our view, including the latter under the Decree doesn’t meet its stated objective of “ensuring Russia’s financial stability.”
• The legality of transactions involving equity interests in LLCs whose key assets are real estate is in question. Potentially, those enforcing the law could treat such transactions as skirting the ban on foreigners acquiring real estate.
• The Decree does not contain a list of foreign states that take “unfriendly actions” against Russian subjects. The list of countries used to include the United States and the Czech Republic [4]; however, for applying other regulations. At a minimum, all of the states that imposed economic sanctions on Russia in connection with the “special military operation” in Ukraine (primarily the United States, EU member states and the UK) could be treated as “unfriendly states”.

Penalties for violating sanctions

Russian law doesn’t set special penalties for violating the regime envisaged by the Decree. However, law enforcement authorities could potentially invoke the following penalties:

• The prosecutor’s office or other government authorities could sue to challenge the transaction.
• Settlements under such transactions could be declared illegal currency transactions and subjected to an administrative fine of 75-100 per cent of the amount of the transaction [5].
• Transferring securities under a transaction could be declared illegal securities trading for which the fines are between 30,000 and 50,000 roubles on officers, and between 700,000 and 1 million roubles on legal entities. Officers could also be disqualified for up to two years [6].

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[1] Russian Federation President’s Decree No. 81 of 1 March 2022 “On Additional Temporary Measures of an Economic Nature to Ensure the Financial Stability of the Russian Federation”.

[2] Please note that the Decree uses the term “resident”, not “currency resident” or “tax resident”. Therefore, it could be difficult in practice to determine its legal status. It seems that, at a minimum, Russian citizens, Russian permanent residents and legal entities registered in Russia will be treated as residents.

[3] That body has existed for quite a long time and acts under the federal law “On Procedures for Foreign Investments in Business Companies of Strategic Importance for National Defence and State Security”, No. 57-FZ of 29 April 2008. The commission has a habit of denying applications that have been filed.

[4] Russian Federation Government Order No. 1230-r of 13 May 2021.

[5] Article 15.25(1) of the Russian Federation Code of Administrative Offences.

[6] Article 15.24.1 of the Russian Federation Code of Administrative Offences.