Foreign Trade.

a. General Discussion.

A comprehensive state monopoly on foreign trade was effective in the USSR during socialist times. It was phased out in late 1980s and early 1990s. Today, private persons may conduct foreign economic activity freely, provided that they comply with applicable laws. In particular, compliance with intricate customs, export control and currency regulations is required.

Foreign trade regulation is matter of federal jurisdiction.

General principles of foreign trade activity are laid down in the RF Federal Law On Fundamentals of State Regulation of Foreign Trade of 8 December 2003 No. 164-FZ. Other prominent normative acts in this sphere include the RF Federal Laws On Customs Tariff of 25 May 1993 No. 5003-1 (as amended 29 June 2004), On Special Protective, Antidumping and Compensatory Measures with respect to Imported Goods of 8 December 2003 No. 165-FZ, On Currency Regulation and Currency Control of 10 December 2003 No.173-FZ, The RF Customs Code of 28 May 2003, the RF Federal Law On measures for Protection of Economic Interests of the Russian Federation in the course of Foreign Trade in Commodities of 14 April 1998 No.63-FZ (as amended on 8 December 2003), and the Federal Law On Production Sharing Agreements of 30 December 1995 No. 225-FZ (as amended on 29 June 2004).

International agreements are an important source of regulation of foreign trade activity. The Russian Federation is a party to the UN Convention on Contracts for the International Sale of Goods (Vienna Convention 1980), UNIDROIT Convention On International Financial Leasing (28 May 1988). There is a number of bilateral trade treaties and treaties on navigation and commerce concluded by the Russian Federation with other countries. Agreements On Free Trade with member-states of CIS are among them. Double tax treaties are another category of international agreements which are of utmost importance for international trade and investment. At present Russia is striving for becoming a member of the World Trade Organization and undertakes various steps to achieve this goal (in particular, modifies the legislation to comply with WTO rules).

Generally recognized and used customs of trade are a subsidiary source of legal regulation (Art. 5 of the RF Civil Code). They have a gap-filling function, applying to the legal regulation of contracts where both the legislation and the contract fail to provide governance on the subject matter. Incoterms published by the International Chamber of Commerce in Paris are an example of such customs of trade.

As regards private law, parties to a contract concluded between a Russian person and a foreign person may choose the law of any country to govern their rights and duties. The choice of law clause will be enforced by the domestic court as well as by the international arbitration tribunal. Default conflict of laws rules are provided for by the RF Civil Code of the RF (Art. 1205 -1224). These rules apply to quasi-contractual relations as well as to contracts in which the parties fail to specify governing substantive law. The general conflict of law rule provides that a contract is governed by the substantive law of the country where a contractual party whose activity plays a “decisive” role for execution of the contract is incorporated, has taken up residence or has a principal place of business.

b. Regulations and Restrictions.

The new RF Federal Law On Currency Regulation and Currency Control of 10 December 2003 No. 173-FZ introduced substantial changes into the system of currency regulation of the RF.

The Law substantially differs from previous currency regulations, namely:
1) pursuant to the law all restrictions for currency transactions shall be based on legislative acts (laws) only and not on regulations (delegated legislation);
2) the law puts an end to the practice of obtaining individual licenses for performing currency transactions;
3) the law lays down the new principle governing currency transactions: “what is not expressly prohibited is allowed”;
4) the law imposes limitations on the powers of state authorities exercising currency control.

The main objective of the law is to establish unified coherent rules for currency transactions. Current account operations are performed without restrictions. Capital account operations are subject to compliance with the following conditions:
1) special accounts for capital account currency operations – bank accounts for financial funds and custody accounts for securities;
2) reservation of certain amounts at a special deposit account with one of Russian banks for a limited time (under the law the amount of deposit may constitute up to 100% of the total amount of a related capital account currency transaction).

Most of the restrictions established by the law (including provisions regarding special accounts and depositing) will remain effective only until January 01, 2007.

As a general rule, the law prohibits payments in foreign currency between residents, however it states the list of operations which can be carried out without limitations (Art. 9)

Non-residents are entitled to carry out operations with securities of national issues provided that they comply with antimonopoly and securities legislation of the RF.

Individuals (residents and non-residents) may perform currency operations without limitations unless special measures stated by the law are introduced by the bodies of currency control (the RF Central Bank and the RF Government). The practice of obtaining individual permissions for carrying out currency operations remains in force in respect of opening and operating bank accounts by legal entities (residents of the RF) outside Russia, however, only till the 17 June 2005.

The list of currency limitations stated in the law is exhaustive and the RF Central Bank may take temporary restrictive measures only upon the conditions of their prior approval by the RF Government and advance notification of participants of currency market. The restrictive measures include use of a special account and reservation. The procedure of reservation and return of the reserved funds on implementing currency operations is set by Instruction of the RF Central Bank of 1 June 2004 No. 114-I.

Regulation of sale of foreign currency earnings is yet another aspect of currency regulation. Foreign currency income from trade operations (no more than thirty per cent thereof) of residents (individual entrepreneurs and legal entities) is to be sold in the Russian Federation on the national currency market within 7 working days of collection (Art. 21 of the law On Currency Regulation and Currency Control; Decree of the RF Central Bank of 30 March 2004).

(ii) Export regulations.

Export regulation is implemented by means of the following: tariff and non-tariff measures (export quotas and licenses, state monopoly for export of certain commodities, customs and currency controls, exclusive right to import and export certain kinds of goods), prohibitions and restrictions on trade in services and intellectual property transfers, economic and administrative measures.

Export trade policy measures are export quotas or bans on exports of certain agricultural or other commodities for a period of not more than three years. Currently, the list of goods that are subject to export quotas as well as lists of goods which may be exported on the basis of export licenses are promulgated by the Decrees of the RF Government of 1 July 1994 No. 758; 6 November 1992 No. 854; 24 January 1994 No. 35; 3 August 1996 No. 930; 8 May 1996 No. 563; 25 December 1998 No. 1539; 5 January 1999 No. 18 (as amended), etc.

Export control of the Russian Federation is a system of measures that has been put in place for the purpose of safeguarding state interests of the Russian Federation established under the law On Export Control of 18 July 1999 No. 183-FZ. It applies to exports of raw materials, supplies, equipment, information and services which are applicable or may be used for creation of military ammunition and equipment, and the like, including dual-purpose materials, equipment, technologies, and services. The lists of items subject to export controls are enacted by decrees of the President of the Russian Federation. Currently such lists are enacted by Decrees of 14 February 1996 No. 202; 26 August 1996 N 1268; 2 September 1997 No. 972, 8 August 2001 No. 1004, 14 January 2003 No. 36, 5 May 2004 No. 580. Items subject to export control may be exported only on the basis of the licenses issued by the Ministry of Economic Development and Trade. Such licenses are issued (1) for each contract on a case-by-case basis or (2) for exports of certain quantity of controlled items into countries that comply with international norms on non-proliferation of mass destruction weapons without designation of concrete buyer (general licenses). Such international rules are provided for by Wassenaar Agreements. Detailed export control procedures are set in the Regulation on the control over external economic activity in respect of the dual-purpose goods and technologies which can be used for manufacturing of military equipment (the Decree of the RF Government of 7 June 2001 No. 447) and in the Regulation on the procedure of control over export of dual-purpose goods and technologies subject to export controls (the Decree of the RF Government of 14 June 2001 No. 462).

Special licensing requirements apply to export of military products, works and services. A list of products, works and services subject to these requirements and the regulation on licensing thereof were approved by the Decree of the RF President of 1 December 2000 No. 1953 (as amended).

(iii) Import policy measures.

The RF Federal Law On measures for Protection of Economic Interests of the Russian Federation in the course of Foreign Trade in Commodities of 14 April 1998 No. 63-FZ operates concurrently with the RF Federal Law On Special Protective, Antidumping and Compensatory Measures with respect to Imported Goods of 8 December 2003 No. 165-FZ. These laws delegate to the RF Government the authority to introduce import trade policy measures.

Import trade policy measures are import quotas (omnibus and country-specific), special duties, antidumping duties and minimal pricing requirements, compensatory duties. The law establishes the procedures for introduction and enforcement of such measures. Such measures may be implemented in case of material damage or a risk of material damage to a branch of national economy of the RF. Existence of damage and a causal link between imports and the damages are established by means of special investigations which are a required step for introduction of special protection, antidumping and compensatory measures. Such investigations are carried out by the Ministry of Economic Development and Trade of the Russian Federation (the Decree of the RF Government of 21 December 2000 No. 990; 11 March 1999 No. 274).

Importation of certain items (encryption equipment, alcohol, strong liquors, tobacco, etc.) is possible only on the basis of import licenses (Decree of the Government of the Russian Federation of 6 November 1992 No. 854 On licensing and Quotation of Imports and Exports of Goods (Works, Services) on the territory of the Russian Federation (as amended), see also Government Decrees of 8 May 1998 No. 431; of 18 February 1998 No. 226; of 27 December 1996 No. 1560 of 1 July 1996 No. 770).

(iv) Customs regulations.

Customs clearance is governed by the RF Customs Code of 28 May 2003 No. 61 FZ. The Code provides for the procedure of customs clearance, offences and procedure for their prosecution.

Most provisions of the RF Customs Code are supplemented by the instructions and regulations issued by the Federal Customs Service and the RF Government. The Code provides that goods and transport vehicles may be imported and exported under one of the customs regimes, established in the Code. Customs regimes are classified into the following groups:
A) Basic customs regime (export, international customs transit etc.);
B) Economic customs regime (customs warehouse, free customs zone, processing within the customs territory, processing outside the customs territory)
C) Final customs regime (reimport, reexport, destruction, rejection to the benefit of the state)
D) Special customs regime (duty-free trade, temporary export, transfer of supplies and other special customs regimes).

General meaning and purpose of each of the regimes are set forth in the RF Customs Code. Detailed regulation is supplemented by the normative acts of the RF Government and the Federal Customs Service.

The customs clearance normally takes place in two steps. At the first step, the customs organ at the entry point of the RF registers the consignment, arranges for security covering estimated customs payments and approves the delivery under customs seal (control). The second step of clearance is performed by the customs office at the place of registration of the consignee, which processes the paperwork, calculates and collects the duties and taxes payable, and releases the consignment.

Generally, foreign entities shall be represented before the customs authorities by a licensed customs broker or a dealer.

(v) Certification requirements.

Compliance with certification procedures is required for importation and operation of the certain products of foreign origin within the territory of the RF. Declarations and certificates of conformity are the evidence that products meet the RF standards, provided for by technical regulations (general and special). Certification is mandatory only for products included in the list of commodities subject to the obligatory certification (Decree of the RF Government of 13 August 1997 No. 1013). Importation of such products into the Russian Federation, sale and operation thereof are possible only after obtaining of declaration or certificate of conformity. The law On Technical Control of 27 December 2002 No. 184-FZ provides that the imported products designated for Russian market and subject to obligatory attestation of conformity under the legislation of the Russian Federation must be accompanied by the certificate of conformity or declaration of conformity. These documents must be submitted to the customs bodies together with the cargo customs declaration.

Products, which are not subject to the mandatory attesting of conformity, can be imported without declarations or certificates of conformity.

Declarations or certificates of conformity issued by the foreign certification authorities may be recognized in the RF under corresponding international agreements.

c. Taxation of Foreign Trade.

Commodities imported into Russia are subject to certain customs payments. These payments are customs duties, fees for customs clearance, value added tax, and excise tax. The Law on Customs Tariff of 21 May 1993 No. 5003-1 (as amended) establishes procedures for application of these payments. Rates of customs duties are set by the Customs Tariff, approved by the RF Government (Decree of the RF Government of 30 November 2001 No. 830). Rates of value added tax and excise duties are set by the RF Tax Code.

Subject to provisions of double tax treaties, income of foreign entities received from sources in the RF is subject to withholding tax at the rate of twenty percent. Such income includes royalties for use of copyrighted works, trademarks, patents, etc., interest on loans, income from sale of securities and other property located in the Russian Federation, consulting, management and other services. Income of foreign legal entities from freight and other transportation operations is taxed at a rate of ten per cent. Fees and penalties recovered by a foreign entity from a Russian party to a contract are deemed interest income and are taxed at the rate of fifteen per cent at source.

Proceeds of foreign entities from exports of commodities into the RF are not subject to the withholding tax provided that a Russian legal entity becomes owner of the commodities prior to customs clearance in the Russian Federation.

Value added tax (VAT) is applicable to payments for works and services provided by foreign entities which are for purposes of VAT tax are deemed to be rendered in the RF, such as construction works in Russian territory. VAT is subject to withholding by a Russian party to a contract with a foreign entity unless a foreign entity is registered as a taxpayer with the tax bodies in Russia. In the latter case, the gross amount including VAT is transferred to a foreign entity which itself becomes responsible for making such payments.

Export customs duties and fees for customs clearance apply to certain commodities. Oil products are subject to a special export tax.