Offsetting in International Transactions – What Are the New Rules?

Currently, Russian companies are not required to repatriate foreign currency profits earned under foreign trade contracts to Russia.

This revenue can be used by Russian businesses, including for offsetting claims with foreign counterparties.

Legislation and courts now allow such offsetting for most claims.

When Is Offsetting Allowed in Foreign Trade Contracts?

The Ministry of Finance of the Russian Federation has clarified several situations where offsetting of mutual claims is allowed without mandatory crediting of foreign currency revenue to authorized banks:

1. Crediting of foreign currency or Russian rubles to accounts of resident legal entities or third parties in banks outside of Russia.

This allows companies to use the received currency to settle their obligations with foreign counterparties without the need to transfer funds through Russian banks. Such transactions must be documented and comply with currency legislation requirements.

2. Payment or reimbursement by customers (non-residents) and/or other third parties (non-residents) for local expenses of residents.

For example, if a foreign customer pays for the local materials or services used by a Russian contractor, this may be considered in the offset.

3. Use of foreign currency received by residents from holding exhibitions, sports, cultural, or similar events abroad.

Income from such activities can be used to settle debts with foreign counterparts.

4. Offsetting mutual claims under obligations arising from reinsurance contracts or services related to concluding and executing reinsurance agreements.

Offsetting is commonly used in this field to simplify settlements between insurance companies.

5. Offsetting mutual claims under obligations arising from reinsurance contracts

When Is Offsetting Prohibited in International Transactions?

Despite its convenience, offsetting is not always allowed. Article 411 of the Civil Code of the Russian Federation sets certain restrictions, such as claims with expired statutes of limitations. Parties can also agree to impose additional restrictions on offsetting in their contract.

Offsetting Procedures in 2024

Currently, offsetting is allowed with any non-sanctioned bank. However, due to Russian banks being disconnected from SWIFT, there may be certain difficulties in processing offsets.

When offsetting obligations with residents of “unfriendly” countries, there are additional restrictions:

– Banks must obtain permission from the Central Bank of Russia.

– Non-banking organizations must obtain permission from the Ministry of Finance after consultation with the Central Bank.

Offset Procedure:

1. Establishing the claims to be offset.

These claims must arise from:

• Foreign economic activity.
• Loans provided.
• Both of these relationships.

2. Signing a mutual reconciliation statement.

A mutual reconciliation statement needs to be prepared and signed, especially for ongoing services or if multiple invoices exist. If the offset involves only one previously issued invoice, the reconciliation statement may not always be necessary.

3. Preparing and signing an offset agreement (full or partial).

The form and content of the agreement must be agreed upon with the bank; otherwise, the bank will not register the offset. The agreement should also include:

– A provision that the reconciliation statement or invoice serves as the basis for acknowledging the debt.

– The currency after conversion (if necessary), especially if the contracts are in different currencies – it is preferable to standardize the currency in the agreement.

4. Submitting documents to the bank.

The following documents must be provided to the bank:

• The offset agreement.
• The mutual reconciliation statement.
• Supporting documents (contracts, payment orders, etc.).
• A cover letter specifying:
• The grounds for the debt.
• The amount of the offset.
• The type of offset (full or partial).

Once the documents are submitted, the bank is required to process the offset.

However, given the current situation, the processing time may be significantly delayed.

Conclusion:

Offsetting in international transactions is an efficient tool, but its application requires careful study of the law and contract terms.

Failure to comply with the rules may result in disputes, financial losses, and legal consequences.

To minimize risks, it is recommended to conduct a thorough analysis of possible restrictions and seek advice from specialists in international law and currency regulation.

Proper documentation and clear definition of offsetting conditions in the contract are key to successfully using this mechanism in international trade.