Litigation - Russia

In 2003 the Law on Currency Regulation and Currency Control (173-FZ) came into force. It aims to:

• ensure the pursuit of a consistent state monetary policy;
• promote the stability of the rouble and the domestic currency market in the development of the national economy and in international economic cooperation; and 
• prevent illegal exports of currency.

Four amendments in the past four years have progressively liberalized the currency regime. However, some restrictions remain and may present a litigation risk to companies in international trade. One such restriction is the obligation on Russian residents to repatriate currency from non-residents.

In 2006 the Russian arbitrazh courts considered over 30,000 appeals against rulings on administrative liability by state administrative bodies - an increase of nearly 45% compared with 2005. This increase was mainly due to a rise in the number of inspections by the authorities. A substantial number of the appeals dealt with administrative responsibility for delays in the repatriation of currency received from non-residents.

Article 19 of the law provides that a resident(1) which enters into a foreign trade agreement with a non-resident(2) for the provision of goods or services must ensure that it receives the currency due to it under the agreement within the agreed period. Parties to an international trade contract have complete freedom to specify this period in the contract,(3) but if the resident fails to repatriate the currency received from the non-resident within the stipulated period, the resident is in breach of the law.

Many international companies which have sold something to a non-resident on behalf of a resident have been fined by the Federal Finance and Budget Supervision Services (FFS). Item 4 of Article 15.25 of the Code of Administrative Offences provides that a resident in breach of the obligation to repatriate currency received from a non-resident may be liable to a fine of between 75% and 100% of the sum which the non-resident has failed to pay into the resident's accounts. As this represents a large fine, most companies tend to contest the rulings in court. However, there is conflicting court practice on this issue. In one case the FFS had imposed a 100% fine on a paper producer because a non-resident purchaser had failed to pay money into the paper producer's account in an authorized bank on time. The fine was confirmed by the court, which found the company guilty of an administrative offence. However, in another case, in which the FFS had imposed a 75% fine on a metallurgical company, a different court reversed the FFS ruling and found the company not guilty of an administrative offence. The delay in payment in both cases was 30 days.

The federal circuit arbitrazh courts play a significant role in Russian litigation practice. An analysis of their rulings shows that the courts tend to reverse fines imposed by the FFS if it can be shown that:

• the resident did not intend to leave the money abroad permanently;
• the delay in payment was less than 30 days;
• the resident did everything possible in the circumstances to obtain the money from the non-resident (eg, by making telephone calls and sending letters claiming the money); and
• the money was repatriated before the FFS carried out its investigation.

The court will also consider whether the resident has previously been found guilty of the same offence.

These conditions make it difficult to persuade a court that an FFS ruling should be set aside; moreover, the pursuit of such claims is generally lengthy. However, a resident company can take preventive measures which will be looked on favourably in the event of litigation. These include:

• reminding the non-resident purchaser in advance of the due date for payment;
• asking the purchaser to provide the resident company with a copy of the payment order immediately after it has been certified by the purchaser's bank;
• telephoning the purchaser and sending official claim letters immediately after the payment term has expired;
• including a clause in the international trade contract to penalize the purchaser in the event of a delay in payments (in order to cover the resident company's liability for fines); and
• specifying a period for payment which is long enough to be feasible for the purchaser.

Such preventive measures will minimize the risk of an FFS fine and, if such a ruling is issued, will give the company a good chance of having it overturned in court.

Endnotes

(1) 'Resident' means a legal entity established in compliance with Russian law or the branches, representative offices and other subdivisions of such an entity outside the Russian territory.

(2) 'Non-resident' means a legal entity established in compliance with the law of a foreign state and located outside the Russian territory. It includes an entity's non-resident branches, permanent representative offices and other persons.

(3) A 180-day limit was abolished in 2005.

International Law Office