Compliance Report ISSA Recommendations 2000

ISSA - International Securtities Services Association

Compliance to the ISSA Recommendations 2000

Market: Russia

Status: October 23, 2001

Recommendation 1
Recommendation 2
Recommendation 3
Recommendation 4

Recommendation 5
Recommendation 6
Recommendation 7
Recommendation 8

Market selection

Recommendation 7

Investor compliance with the laws and regulations in the home countries of their investments should be part of their regulators' due diligence process. They, in turn, should be treated equitably in the home country of their investments especially in respect to their rights to shareholder benefits and concessionary arrangements under double tax agreements.

1. Do domestic regulators monitor the procedures in place at their locally based cross-border custodians to assure compliance with the laws and regulations of the home countries of their investments? All market participants performing depository (custody) activity on the Russian market are subject to local regulation and are obliged to obtain a license for this type of activity irrespective of whether they are residents or not. In order to be licensed as a depository a legal entity must fulfil a number of requirements and during all the period of its activity as a depository is obliged to submit reports on depositary transactions in accordance with the requirements set forth in the legal acts, are subject to monitoring of depository documents by the licensing authority and other forms of control provided by the Russian legislation.

Regulation on Depositary Activities in the Russian Federation stipulates the terms and conditions of depositary activities in the Russian Federation, establishes requirements to the depositary activities, regulates the general rules for keeping depositary records as well as determines the procedure for the state regulation and supervision over depositary activities and is applicable to all the organizations performing depositary activities on the territory of the Russian Federation, without any differentiation between residents and non-residents.

2. What are the areas (e.g. benefits, investor compensation) where foreign investors are not treated in the same way as local investors? There are certain limits that the Anti-Monopoly Committee stipulates, for example 12% limit of foreign investments in the banking sector. Also some companies may restrict foreign participation in their capital. For example, the gas state conglomerate GAZPROM established 9% limit for foreign participation. The largest energetic company RAO UES does not allow foreign ownership exceeding 25% of the charter capital.

Besides non-residents are not allowed to invest new funds into state bonds market and can only use the funds remaining after August 1998 on their special accounts established for state bond trading.

3. Can sales proceeds and income be repatriated without any restrictions? All sales proceeds, income and dividends connected with operations of non-residents with Russian equities can be repatriated through the special cash accounts without any restrictions.

Proceeds from sale/redemption of state bonds and corporate securities listed on the Moscow Interbank Currency Stock Exchange (MICEX) must be credited to special transit accounts to stay there for 365 days before they can be repatriated. Alternatively, non-residents may leave their sales and redemption proceeds for trading on MICEX to buy state bonds and corporate securities. From time to time the Ministry of Finance holds currency auctions to sell foreign currency to non-residents. The USD funds purchased at the auctions could be freely repatriated.

Proceeds from all operations with Minfin bonds can be repatriated without any restrictions.

4. Are double tax agreements simple to apply, and do foreign investors receive promptly their full entitlement to dividends and interest payments? Non-residents can obtain treaty benefits by providing the Russian tax authorities with completed forms of Notification about sources of income within Russia and claim for an exemption of incomes sourced in Russia. All these documents should be submitted to the tax authorities at least before disbursement and can be presented by non-resident directly or through a resident agent. The exemption is given by the Russian tax authorities for one calendar year.

As of now the current legislation does not stipulate any fixed period during which the dividends must be paid.The payment date is determined by the Charter of the company or by resolution of the general shareholders meeting. In practice issuers rarely meet their obligations to fully distribute dividends and practically never pay dividends in time. The payment delay may exceed even several years. Recently the President has signed into law changes to the Law on Joint Stock Companies, which will come in force effective January 01, 2002. The amended law will oblige the issuer to pay dividends within 60 days from the date of the adoption of the decision to pay them and in case of non-payment of dividends in time the shareholders will have the right to take it into court.

Interest payments are always paid and transferred to non-residents' accounts exactly on the date determined by the issue prospectus. For non-state bonds a slight delay can be caused by technical reasons, if payment agent fails to transfer funds in time.

1.	Do domestic regulators monitor the procedures in place at their locally based cross-border custodians to assure compliance with the laws and regulations of the home countries of their investments?	All market participants performing depository (custody) activity on the Russian market are subject to local regulation and are obliged to obtain a license for this type of activity irrespective of whether they are residents or not. In order to be licensed as a depository a legal entity must fulfil a number of requirements and during all the period of its activity as a depository is obliged to submit reports on depositary transactions in accordance with the requirements set forth in the legal acts, are subject to monitoring of depository documents by the licensing authority and other forms of control provided by the Russian legislation. Regulation on Depositary Activities in the Russian Federation stipulates the terms and conditions of depositary activities in the Russian Federation, establishes requirements to the depositary activities, regulates the general rules for keeping depositary records as well as determines the procedure for the state regulation and supervision over depositary activities and is applicable to all the organizations performing depositary activities on the territory of the Russian Federation, without any differentiation between residents and non-residents.
2.	What are the areas (e.g. benefits, investor compensation) where foreign investors are not treated in the same way as local investors?	There are certain limits that the Anti-Monopoly Committee stipulates, for example 12% limit of foreign investments in the banking sector. Also some companies may restrict foreign participation in their capital. For example, the gas state conglomerate GAZPROM established 9% limit for foreign participation. The largest energetic company RAO UES does not allow foreign ownership exceeding 25% of the charter capital. Besides non-residents are not allowed to invest new funds into state bonds market and can only use the funds remaining after August 1998 on their special accounts established for state bond trading.
3.	Can sales proceeds and income be repatriated without any restrictions?	All sales proceeds, income and dividends connected with operations of non-residents with Russian equities can be repatriated through the special cash accounts without any restrictions. Proceeds from sale/redemption of state bonds and corporate securities listed on the Moscow Interbank Currency Stock Exchange (MICEX) must be credited to special transit accounts to stay there for 365 days before they can be repatriated. Alternatively, non-residents may leave their sales and redemption proceeds for trading on MICEX to buy state bonds and corporate securities. From time to time the Ministry of Finance holds currency auctions to sell foreign currency to non-residents. The USD funds purchased at the auctions could be freely repatriated. Proceeds from all operations with Minfin bonds can be repatriated without any restrictions.
4.	Are double tax agreements simple to apply, and do foreign investors receive promptly their full entitlement to dividends and interest payments?	Non-residents can obtain treaty benefits by providing the Russian tax authorities with completed forms of Notification about sources of income within Russia and claim for an exemption of incomes sourced in Russia. All these documents should be submitted to the tax authorities at least before disbursement and can be presented by non-resident directly or through a resident agent. The exemption is given by the Russian tax authorities for one calendar year. As of now the current legislation does not stipulate any fixed period during which the dividends must be paid.The payment date is determined by the Charter of the company or by resolution of the general shareholders meeting. In practice issuers rarely meet their obligations to fully distribute dividends and practically never pay dividends in time. The payment delay may exceed even several years. Recently the President has signed into law changes to the Law on Joint Stock Companies, which will come in force effective January 01, 2002. The amended law will oblige the issuer to pay dividends within 60 days from the date of the adoption of the decision to pay them and in case of non-payment of dividends in time the shareholders will have the right to take it into court. Interest payments are always paid and transferred to non-residents' accounts exactly on the date determined by the issue prospectus. For non-state bonds a slight delay can be caused by technical reasons, if payment agent fails to transfer funds in time.