So what happened?

On March 28, 2023, the Bank of Russia issued Official Clarification No. 1-OR, which created more controversy and ambiguity than it clarified anything specific.

In this clarification, the Bank of Russia reminded that, for transactions between residents and "unfriendly" persons involving Russian securities that are accounted for and held by foreign organizations, and where settlements for such transactions (operations) are made through accounts opened with foreign financial institutions, a permit procedure is established (i.e., approval from the Government Commission is required).

However, despite the above reminder, the Bank of Russia went further and stated that as of March 3, 2023 subparagraph 1.11 of paragraph 1 of Bank of Russia Official Clarification No. 2-OR dated 18.03.2022 shall not apply to transactions resulting in the acquisition of title to securities. At the same time, the Bank of Russia did not specify which securities exactly — all securities or only Russian ones.

We remind you that subparagraph 1.11 of paragraph 1 of Bank of Russia Official Clarification No. 2-OR dated 18.03.2022 established that currency restrictions did not apply to transactions (operations) resulting in the acquisition of title to securities carried out by residents with "unfriendly" persons, if:

• the securities are held by a foreign depository (bank or other financial market organization) located outside the territory of the Russian Federation, which maintains records of rights to securities and holds them outside the territory of the Russian Federation;

• settlements under transactions involving such securities are made through accounts (deposits) opened by residents with foreign banks (other financial market organizations), information about which has been disclosed by residents to the Russian tax authorities.

What could the repeal of subparagraph 1.11 of paragraph 1 of Bank of Russia Official Clarification No. 2-OR dated 18.03.2022 lead to?

The repeal of the above provision may mean that the sale of any securities (not only Russian ones) held in foreign accounts of currency residents will require mandatory approval from the Government Commission. In other words, any sale of securities without a permit would be regarded as an illegal foreign exchange transaction, because an "unfriendly" non-resident may appear somewhere in the transaction chain (even on exchange-traded transactions).

For the purposes of these restrictions, residents include all foreign exchange non-residents (i.e., Russian citizens or holders of a Russian residence permit, whether or not they reside in the territory of the Russian Federation for more than 183 calendar days).

Thus, transactions involving securities carried out after March 3, 2023 on foreign accounts may fall into the category of illegal foreign exchange transactions.

It should be noted that the provisions of Bank of Russia Official Clarification No. 1-OR dated 28.03.2023 are themselves ambiguous.

On the one hand, Clarification No. 1-OR links the repeal of subparagraph 1.11 of Clarification No. 2-OR to the entry into force of Decree No. 138. That is, currency restrictions and the need to obtain Government Commission approval should apply only to Russian securities held abroad, as well as to securities of foreign issuers certifying rights in relation to Russian securities.

On the other hand, the wording of the provision repealing subparagraph 1.11 of Clarification No. 2-OR refers to securities in general, without specifying the type of securities or the status of the issuer (seller or buyer). Thus, based on a formal interpretation of the provisions of currency legislation, which are imperative in nature, it may also be assumed that as of March 3, 2023, any transactions with securities through foreign accounts are prohibited without Government Commission approval.

We hope that the Bank of Russia will clarify this issue and specify that the restrictions apply only to Russian securities, as well as to securities of foreign issuers certifying rights in relation to Russian securities. At the same time, the clarification should also apply retroactively to the period starting March 3, 2023. Otherwise, Russian investors who traded securities abroad will find themselves in violation of currency restrictions.

What can be done?

First of all, it is necessary to postpone transactions involving securities on foreign accounts until further clarification is issued.

As a safeguard and to avoid currency risks in respect of transactions already completed, currency residents may, within 45 calendar days from the date of the illegal foreign exchange transaction, transfer the funds received under the securities transaction to Russian bank accounts. This will eliminate the risk of being held liable for a foreign exchange violation in the amount of 20% to 40% of the amount of the illegal foreign exchange transaction.