Currency Curtain

Without waiting for feedback on the Central Bank’s advisory report on a new strategy in the financial market, the Russian Federation continued to “push” the market towards devaluation and increased restrictions on cross-border capital transactions. A decree was issued allowing banks to fail to fulfill deposit agreements of legal entities in foreign currency in the event of sanctions. The Central Bank confirmed future protective regulatory surcharges on foreign currency loans and introduced a “quarantine” for arbitrage transactions with the repatriation of Russian shares to the property of residents from the West. The dissonance in regulation between stimulating imports and de-stimulating currency is becoming more and more pronounced.

Following the presidential decree of August 5, 2022, prohibiting the transfer of rights to shares in the capital of a significant part of Russian companies owned by “unfriendly” non-residents (see “Kommersant” dated August 8), yesterday a new decree was issued – this time implementing the principle of “pushing” to further devaluation of the Russian market. Part of the decree concerns Eurobond redemption regime Russian issuers using “type D accounts”, the other part of the decree allows Russian banks, in the event of sanctions being imposed against them and foreign currency seized on their accounts, to suspend operations (including transfer and issuance) under account/deposit agreements for the amount of currency arrested on correspondent accounts or assets.

The decree extends this right only to funds in foreign currency received by the bank after August 8. This is not about the cancellation of obligations in relation to legal entities, but about the suspension, however, interest, fines, and penalties on such suspended deposits are not met. If only a part of the bank’s funds in a foreign correspondent account is arrested, the suspension applies to a part of the deposit amounts in proportion to the volume of foreign currency accounts of the entire clientele-legal entities in the bank, in other cases, different rules apply to foreign currency deposits and funds in foreign currency accounts.

De facto, the decree officially transfers part of the risk of arrest on foreign currency deposits to the corporate clientele of the bank and is addressed de facto to everyone who is interested in a new foreign currency deposit or account, since we are talking about (yet) non-sanctioned banks.

As a kind of compensation, the decree allows the bank that fell under sanctions, by agreement with the client, to transfer directly to him the right to claim against a foreign bank holding a correspondent account.

At the same time, the Central Bank announced in the form of a draft regulatory act the introduction of surcharges on loans and borrowings in foreign currency – differentiated by the “friendliness” and “unfriendliness” of the currency (in the latter case, the surcharge will be quite prohibitive 120%) and by the sufficiency of foreign currency earnings. While it is expected that exporters will have advantages, and loans secured by state guarantees are removed from the regulation, what is happening, like the provisions of the decree, will obviously create additional problems for potential importers.

In general, the attempts of the Central Bank to confidently divide the market into “exporters” and “importers” do not take into account the complexity of the business infrastructure that provides imports, and the further, the more the task of devaluating the Russian economy and the task of stimulating imports diverge. Capital and trade components of the balance sheet are separated only conditionally, and increasingly non-standard restrictions in one part of the single market will negatively affect other parts of it. In light of the fact that the “freeze” of assets of non-residents is getting more and more confident prospects to last for many years, all attempts to additional (and often just situational) restrictions they only build an additional wall from above between the Russian and Western markets – despite the liberalization of part of the currency control, as a result, barriers to imports will only de facto increase.

Dmitry Butrin