Starting June 17th, 2022, Russian residents can receive proceeds from the sale of foreign shares into their non-Russian brokerage or bank accounts as long as the proceeds are received from non-Russian residents in non-Russian currency and the shares are kept outside of Russia.
March 21, 2022
On March 18, 2022, the Russian Central Bank clarified that the restrictions imposed under Decree No. 81 (see our earlier alert below) do not apply if a Russian resident acquires shares from a company of an “unfriendly” country, as long as:
- the shares are held by a foreign entity outside of Russia;
- the money used to acquire those shares was already in a foreign bank account; and
- such funds and accounts have been previously disclosed to the Russian tax authorities in accordance with Russian law.
However, despite the above clarifications that seem to loosen the prior rules, we still urge caution and would not recommend proceeding with any share transactions, including the issuance of shares upon RSU vesting. See further details below. It is also important to note that Russian residents are still prohibited from remitting funds abroad to acquire shares of a US company.
Implications for RSUs
The Central Bank’s clarification does not specifically address RSUs. In theory, it may be possible to take the position that Decree No. 81 should no longer apply to RSUs, since employees do not typically remit any funds to acquire the shares, but this is not without risk.
As a reminder, Decree No. 81 broadly prohibits any transaction involving the transfer of title to shares of a resident of an unfriendly country. The Central Bank clarification sets out only a very narrow exception, and particularly given the current circumstances, we would recommend avoiding any ambiguity. It is uncertain how an individual could confirm to the government’s satisfaction that a share transaction did not involve any payment or even whether a permitted payment from a foreign account to purchase shares would include a “non-payment” that is not otherwise specifically permitted under the recent clarification. It is also unclear how an individual would prove that he has properly complied with all reporting obligations or if an RSU agreement would be accepted by the authorities as proof that any share issuance was simply a fulfillment of a transaction entered into before the Decree was issued.
Accordingly, per our earlier alert, it is advisable to continue to formally suspend any outstanding stock awards for Russian residents for the time being.
Implications for ESPPs
With respect to ESPPs, please note that the Central Bank clarification appears to only allow purchases facilitated through a brokerage account outside of Russia and with personal funds already located outside of Russia (and both previously held in accordance with Russian law). The clarification does not allow Russian residents to buy US shares using any other funds, and it seems this may now by implication prohibit the use of book entries or transfers from local payroll within Russia (as mentioned in our prior alert).
Accordingly, under Decree No. 81, such transactions would still require a governmental approval (which is unlikely to be granted at this time). Even if an employee’s US brokerage account was previously reported to the Russian tax authorities, they would likely in the future request a proof that a purchase transaction was done in accordance with the law. A fund transfer undertaken by another entity (i.e., the Russian employer) on the individual’s behalf likely would not be a sufficient explanation.
March 8, 2022
The Russian President has issued Decree No. 81 — “due to the unfriendly actions of the US and other countries in violation of international law” — establishing special procedures for any transactions leading to the transfer of share title between Russian residents and foreign persons connected to such countries unless special authorization is obtained.
Under a separate Decree No. 79, Russian residents also cannot receive any funds in their foreign bank accounts.
What this means for US companies with Russian employees/consultants
- Decree No. 81 covers any transfer of title to shares, and it is very likely that the “special permit” exception was not drafted for the general public. Therefore Russian residents are essentially prohibited from purchasing or receiving shares in US companies (or any other companies incorporated in any country imposing sanctions on Russia).
- Under Decree No. 79, Russian residents will not be able to receive 1) proceeds from the sale of any shares or 2) cash dividends into their US-based brokerage or bank accounts.
- The Decrees impose restrictions on Russian residents, not directly on the US company that they work for.
- For purposes of the exchange control laws and regulations, a “Russian resident” likely covers any Russian national even if they are living outside of Russia and are not a tax resident in Russia.
Practical considerations and next steps
Note all of the above proposed steps may be subject to stock plan limitations, though generally plans and agreements should contain provisions giving the company broad discretion to take such actions in the current circumstances.
For more details regarding US/EU sanctions on Russia and the continuing conflict in Ukraine, please see the following: