Center Kudrin proposed to abolish exchange controls

Center for strategic research Alexei Kudrin proposes to abolish the currency control in Russia. It is too burdensome, the responsibility for it hard, and deregulation will increase economic activity, experts say.

Liberalization of currency regulation in Russia in 1990-2000-ies was “partial”, there remain “considerable limitations associated with legal requirements to the procedure of carrying out currency transactions”, says the Center for strategic research (CSR) in its new report on the reform of the currency control (RBC). “Prohibitive” regulation hinders cross-border activities of Russian business, the very mechanisms of control “does not allow to achieve macroeconomic goals of stability” of the ruble, come to the conclusion of the CSR, which developed the economic program of President Vladimir Putin. Currency control in the country, it is simply necessary to undo, experts say.

What’s wrong with exchange controls

CSR calls the eight key issues of currency regulation in Russia. First, the existence of the concept “exchange resident” which is not in the OECD countries. Residents are all legal entities created by domestic law, and this year they considered all Russian citizens (until the Russians living abroad continuously for more than a year, becoming residents).

The second problem is the prohibition to enroll foreign account, the funds from the sale of movable and immovable property and securities. This “undue burden for bona fide economic activities”, which, in particular, prevented Amnesty 2015-2016, believe in CSR.

Among other difficulties, the Center Kudrin highlights the requirement of currency by residents of reporting on foreign accounts (if transactions posted to such accounts, is unlawful, due to which residents face a fine of 75-100% of their amount), as well as requirements for the repatriation of Russian and foreign currency, received by the companies under foreign trade contracts. The latter does not allow to terminate the obligations of cross-border contracts with non-residents via netting-off and forgiveness of debt and have a negative impact on e-Commerce, for which a quick cross-country payments have a “key value,” the authors write.

The fifth issue is the prohibition of foreign currency operations between residents (both in Russia and abroad). Moreover, in practice, to control the conduct of such operations is often impossible. Sixth — too strict liability for violation of currency legislation (too large fines and potential criminal penalties for virtually any violation of the requirements of currency legislation because of the wide wording in the criminal code).

Finally, specifies the CSR, system administration of exchange control is too complex. There are regulatory bodies (tax, Central Bank, VEB, customs) agents regulation (Central Bank, government and authorized banks): first, may prescribe to eliminate violations or to apply measures in accordance with the law, while the latter only carry out inspections. The last problem, according to the CSR, that foreign exchange restrictions are creating barriers to the development of the Eurasian economic Union.

Disputes authorities

On the liberalization of exchange controls and the differences with the Central Bank on this issue, said the Minister of economic development Maxim Oreshkin. Now the control is very hard and is “one of the vestiges”, which inhibits the energization, and a full interdepartmental exchange for these operations is missing, said Oreshkin.

His version of the easing of exchange controls in January published by the Ministry of Finance. According to the project of the Ministry, exporters will not be fined for violation of the timing of the receipt of revenue from non-residents (and importers — for untimely repayment of the advance payment for undelivered goods), if the delay is less than 30 days. The Finance Ministry’s proposals also provide for a partial reduction of fines with the current “draconian” (in the words of the Minister Anton Siluanov) 75-100% of the amount of the unreturned funds up to 33-50%. However, this mitigation will not affect, for example, transfer of funds to a foreign account individuals bypassing the Russian authorized Bank.

Also last fall, the Finance Ministry proposes to give the government and the Central Bank the authority to impose severe foreign exchange restrictions in crisis periods. The Ministry of economic development this proposal is not supported. Subsequently, the Finance Ministry has refused this idea. Archaic exchange control was one of the last major meeting of businessmen with Prime Minister Dmitry Medvedev.

Traditionally more cautious on the issue of exchange control the Central Bank. You need to find the balance between complete abolition of exchange controls and tight control — to remove it “immediately” is impossible, said at the beginning of the year, the Deputy Director of the Department of monetary policy of the Central Bank Andrey Lipin.

International experience

OECD countries 1980-1990-ies do not require residents repatriation and sale of foreign currency earnings, they also do not resort to restrictions on the use of foreign accounts, the authors of the CSR report. The developed countries shall exercise control over cross-border flows of funds in the framework of the legislation, Bank supervision and legislation on counteraction to laundering of proceeds of crime.

The US government has never used exchange controls and did not restrict operations with foreign currency and Bank accounts, experts say CSR with reference to the OECD report. While in the U.S. there are strong controls over the movement of funds to the resident. According to the adopted in 2010 the law on tax reporting of foreign accounts (Foreign Account Tax Compliance Act, FATCA), the IRS receives information about accounts of U.S. tax residents in foreign financial institutions (banks, investment funds, etc.). Reporting FATCA is implemented through intergovernmental exchange, or banks of several countries (Australia, Bermuda, Chile, Switzerland, Japan) to register with the IRS to provide data about American tax residents.

In the BRICS countries apply foreign exchange restrictions, noted author of the report. Thus, in India, residents are prohibited from having accounts abroad (this is only possible through an authorised intermediary), as well as to loans in foreign currency (excluding transport, insurance and construction companies). The government of India introduced a requirement for mandatory repatriation and sale of foreign currency earnings, and the law on currency regulation provides for the control over cross-border currency transactions.

Photo: Mukesh Gupta / Reuters

Residents of China should repatriate and sell foreign exchange earnings within 90 days after the end of import-export operations, and foreign currency accounts in foreign banks can open only the residents, whose activities are connected with periodic payments abroad. In addition, each receiving money from abroad or transfer of foreign currency abroad must have a rationale, which are a foreign trade contract and customs Declaration.

Currency regulation in Brazil is more progressive: the exporter has the right to leave abroad 100% of export earnings, and restrictions on transactions with foreign accounts, no. Thanks to the electronic tracking system (captures all the action on currency transactions) residents save on banking services. Legal entities can submit reports in the online system about your foreign account. In Russia, however, reporting of legal entities for foreign Bank accounts must be provided quarterly to the tax authorities.

Cancel in two stages

Currency restrictions in Russia were “anachronistic”, according to CSR experts. The law “On currency regulation and currency control” should be abolished, and the corresponding conceptual apparatus to be moved to other normative legal acts. The rejection of strict control “will reduce the costs of Russian economic agents and will increase economic activity,” the report said.

Liberalization of currency regulation should be held in two stages, believe in CSR. The first part of the reform, which should be implemented by the end of 2018, should cancel requirements for repatriation and to establish an open mode of use of foreign accounts. Then the Ministry of Finance and the Central Bank, according to the CSR, needs to prepare for the lifting of the ban on exchange operations between residents and at the same time (in the logic of the trend of dollarisation of the economy) to the introduction of the Civil code ban on the use of foreign currency as means of payment in the country. In addition, the rules reporting foreign accounts should be transferred into the Tax code (now regulated by Federal law), the authors of the reform.

The second phase of the reform are designed to 2019-2020. CSR proposes to abolish the requirement of filing of statements by persons whose accounts are in countries with which Russia automatically exchanges information according to OECD standards. Now Russia agreed to exchange information on foreign Bank accounts tax residents with 73 States, however, require the use of financial institutions of the OECD standard is not yet established, the authors note. Most other countries such standards already adopted.