A New Era in Payments and Cash Management in Russia

Payment regulations in Russia have historically been strict due to the legacy of the closed economy in Soviet times. Certain rules remain in place that can, at best, hamper business and, at worst, prevent it, such as the requirement that payments-related information be supplied only in the Cyrillic alphabet. For this reason, the Russian retail payment market is still predominately domestically focussed, with very little cross-border payment traffic within or outside the region.

Other central and eastern European countries (CEE) face similar restrictions. However, due to its strict regulatory regime, the difficulties are more apparent in Russia than countries such as Poland and Romania. For example, in Russia, foreign currency payments are heavily regulated by currency control, basically a restrictive regime of checking and approving any currency transfer between resident and non-resident accounts.

Russian banks and foreign banks’ subsidiaries act as agents of the Russian Central Bank (RCB) in enforcing domestic currency and foreign exchange (FX) controls. Cross-border settlements may only be made by Russian residents if the underlying import/export/loan agreement is shared with, and registered by, the bank, which also needs to request special authorisation in the case of commercial agreements exceeding US$50,000 in value.

All banks operating in Russia are obliged to request proper transaction-related information before the payment can be executed. Only once this information has been submitted, as well as fulfilment of certain procedural steps, may a payment be made. This has slowed the development of straight-through processing (STP). Creating a long-term inter-company lending agreement can, however, reduce the amount of documentation required.

An international settlement transaction may be rejected by the bank if the supporting documents required are not in good order, or are not provided in a timely fashion. Also, documentation, such as a copy of the customs declaration, to support every settlement should be promptly provided to the bank in order for the latter to make a report to the Russian authorities.

Currency control represents a challenge for the local banking community, as well as being a challenge for the economy as a whole, by adding extra transactional costs.

Banks, as well as corporates, need to implement processes and procedures in order to comply with Russian currency control legislation. This requires hiring extra staff and training personnel involved in cross-border payments reporting. Due to the currency control regime, domestic banks run enormous overheads, which results in the level of cross-border payment fees in Russia being much higher than average for the CEE region. It can also take longer for a payment to be processed, particularly where local staff are non-English speaking.

Currency control is, however, set to become less cumbersome. In November 2010, legislative amendments to improve the exchange of information among banks and tax and customs authorities, and therefore increase the efficiency of currency control in Russia, were signed into law. These came into effect in February 2011.

In Russia it is important to take a long (five- or 10-year) view on regulation, which can be slow to change. However, recently there have been some significant changes. For example, although the single online clearing system has not yet materialised due to a lack of bank support, other changes have improved the system in recent years, such as the real-time gross settlement (RTGS), known as Banking Electronic Speed Payment (BESP), which was launched in 2007. Plus, because SWIFT messaging must be converted to Cyrillic, some Russian banks now offer language support, including English-language banking software.

Cash Pooling in Russia

Liquidity has risen to the top of the agenda for Russian corporate treasurers, as well as multinationals operating in Russia. One method of improving corporate liquidity is through cash pooling, which has brought the existing cash pooling regulations under scrutiny. No specific regulation exists on cash pooling, which is treated under the existing legislative framework as part of the civil and tax laws. ING recently obtained an ING-specific clarification from the RCB as to how cash pools can be treated and processed. For this reason, cash pooling is still in its infancy in Russia.

Netting is not possible in Russia due to the prohibition on having a negative account balance between two banking days. Under Russian Accounting Standards (RAS), which are different from International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (GAAP), no bank account can show a negative closing balance. There is no likelihood of this changing in the near future, even in light of the gradual evolution of RAS towards IFRS.

Cash Management Techniques

Physical pooling (zero balancing): This technique is problematic, because of the introduction of new regulations governing the treatment of standing orders that prohibit balance aggregation. This, in turn, affects the optimisation and enhancement of interest.

Changes in RCB regulations have made processing of customers’ standing instructions operationally and legally cumbersome, although the ING-specific clarification on the matter has improved the situation.

Notional pooling: True notional pooling cannot be implemented as there is no concept of cash pledging in Russia, which means that cash held in a current account in Russia cannot constitute the 100% security for a loan. This means that only interest optimisation or enhancement are possible, since they are not affected by currency control regulations and can mix currencies, as well as resident and non-resident bank accounts.

Overlay cash pooling: Here the market is opening up, albeit slowly.

Since the changes in the Russian currency control legislation took effect in 2007, Russian resident companies can open offshore bank accounts without obtaining a licence from the RCB. In addition, transfer of funds to such accounts is simplified. However, no overdrafts on such accounts are authorised by Russian legislation. As a result, Russian resident entities can place cash in cross-border overlay cash pools; but a set of alternative solutions needs to be implemented if the resident entity expects to be funded from the overlay cash pool.

Much documentation and legal identifiers are currently required, not only for the company’s own records but also for the authorities’ requirements. Russian resident companies have to register an off-shore bank account with the Russian tax authorities, and transactions on such an account should also be periodically reported to the tax authorities.

E-commerce: Pushing the Boundaries

Over the past two years, the payments landscape has seen key developments, such as the emergence of non-bank payment mechanisms and networks, for example internet payment and fund transfer systems, as well as mobile and payment terminals. The number of payment terminals has grown from 250 in 2002 to over 60,000 devices in mid-2010.

The gradual shift from cash to electronic payments (e-payments) is particularly strong in the mobile industry. Merchant acquiring has progressed rapidly through social networks and mobile wallets, effectively blurring the boundaries between cash top-ups and the e-payments business, and the ability to pay for services using air-time.

These new payment methods have become hugely popular in the country in the past three years. In 2009, online spending in Russia reached RUB40bn (US$1.4bn). It is estimated, that the daily turnover through the Russian payment terminal networks exceeded RUB1.6bn (US$53m) 3Q10 and was set to increase by 40% in 2010.

Some market participants believe that the speed of development and the relative laxity in regulation compared to the banking environment will help the non-bank players to leapfrog other players in the payments industry. It could also cause related markets, such as e-commerce, to boom. This is also partly due to developments in the wider economy – for example, with a growing rate of consumer adoption of broadband, the critical mass of potential users is already present.

The RCB had previously taken a hands-off approach to the new players in the payments arena, which has been left to grow virtually without supervision. However, the non-bank payments industry has now reached the point where the RCB is looking to contain risk by introducing new guidelines and regulation for the non-banking payment sector.

Additionally, the Russian government approved a long-awaited bill in November 2010 to regulate e-payments. The new legislation requires all non-bank payment providers to obtain a licence from the RCB. They also need to have RUB18m (US$600,000) in equity – something that could obstruct smaller players from entering the market.


Although the financial crisis partly slowed the development of the cash management and payments landscape in Russia, transaction banking is still core to bank activity, both from a regional perspective and for global banks operating in the region. These products will continue to develop over the next few years, albeit through an increasing number of channels.

To operate successfully in Russia, treasurers need to have precise information on cash balances and regulations, in order to make appropriate decisions. Ensuring the appropriate data is being collected and extracted will help make the most of available products in the marketplace. This can take the form of investing locally, rather than restricting themselves to overlay pooling solutions. Talking to local market players, both banks and other corporates, domestic and multinational, will also pay dividends. Some local companies have been extremely successful in adapting global structures in the Russian environment and they are keen to share these success stories with their peers.

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