CIS Legal Update - September 2013: New Law Officially Bans Foreign Banks from Opening Branches on the Territory of the Russian Federation

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In keeping with the commitments it made prior to joining the World Trade Organization (WTO) to remove inconsistencies in legislation regulating the Russian banking sector, the Russian Government passed the Federal Law “On Amendment of Certain Legislative Acts” (the “Amendments”), which entered into force on March 26, 2013 and officially bans foreign banks from opening branches in the Russian Federation (RF).1 Although foreign banks were never expressly prohibited from opening branches in the RF, they were nevertheless unable to do so because no rules were ever established for their registration. Now it is expressly stated that foreign banks are prohibited from operating branches on the territory of the RF.

In addition to addressing this inconsistency, the Amendments underscore the competitive advantages theoretically afforded to branches of foreign banks over their domestic counterparts. Had there been a legal framework to register a branch in the RF, foreign banks would have enjoyed significant competitive advantages over domestic banking institutions since branches of foreign institutions are not subject to Russian jurisdiction and thus would not have been obliged to comply with the requirements stipulated by the Central Bank of the Russian Federation, including the filing of monthly reports and the implementation of both Russian and international accounting standards. Moreover, branches would not have been required to make mandatory contributions to reserve funds (such as reserve fund for possible losses, reserve fund for possible losses resulting from operations with securities, etc.).

Since all foreign banks in the RF operate as subsidiaries or representative offices, the Amendments had little effect on Russia’s financial industry. As previously mentioned, the Amendments simply rectify inconsistencies in the banking industry – an approach that was agreed to during the negotiations preceding the RF’s accession to the WTO and is part of the RF’s strategy to develop the Russian banking sector. We will continue to monitor developments regarding the RF’s continuing commitment to bring its banking and finance sector in line with WTO requirements and recommendations, and will keep you updated appropriately.

Footnotes

1. Part 3 of sub-section “?” of Section 7 of the Protocol on the Accession of the Russian Federation to the Marrakesh Agreement of April 15, 1994 establishing the World Trade Organization”, which was ratified by the Russian Federation on July 21, 2012, states the following: “with respect to banking services, the commercial presence of banks is only permitted in the form of a Russian legal entity or in the form of a representative office of a foreign bank.”

 

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