vlad.tribnet.com / Issue #165 / Business / Reading article...

Having registered several companies in Russia over the past six years, I have run into a number of annoying regulations. But I never thought I'd see the day Russia would try to stop foreign investment altogether. That was before I registered our most recent U.S.-Russian joint stock company on Sakhalin Island.

To hear Russian officials talk about the burgeoning investment climate in Russia, you would never imagine that just a few months ago the Central Bank began restricting the transfer of charter capital into Russian joint ventures. Alas, it is a violation of Central Bank Decree No. 482 to move foreign currency into the charter capital fund of a Russian enterprise without a license from the Central Bank.

Unfortunately, the Sakhalin Administration failed to note this detail as it accepted our $1,500 corporate registration fee. In fact, we completely registered our company, opened our commercial accounts, and started issuing invoices before our bank advised of the new restriction.

At first I couldn't believe that the only way to transfer these funds was to go through the agonizing process of getting a Central Bank license. When I asked what I could do short of traveling to Moscow, the bank's lawyer said, «We recommend seeking an unoffical alternative to this problem." He wouldn’t reveal the secrets of this suspicious option. I couldn't imagine many legitimate foreign corporations wanting to venture into this realm of the "unofficial."

After a bit more digging, I discovered that there is at least one other legal method of transferring in foreign capital. This option involves opening two accounts. First, you open a temporary hard currency account into which your foreign parent company transfers the cash for conversion into rubles. Then you open a temporary ruble account for the newly converted rubles.

From this temporary ruble account, the funds can then be legally transferred into the Russian company's charter capital account. This option still requires Central Bank approval, though, and applications are not reviewed until after the capital contribution is transferred to the temporary account. So there is the chance that you will go through all this work and expose all of your funds, but not receive permission. Not having much of choice, though, we selected this lesser of two evils and opened the temporary accounts.

We needed to figure out a faster way to get some operating money onto the Island. So while we waited for our bank to verify our documents and collect its fees, we concluded a simple credit agreement between our U.S. parent company and the Russian venture, and transferred the necessary foreign capital to Russia in the span of three days.

Herein lies the grim absurdity. What's the point of restricting investment in a Russian company, when it is possible to transfer unlimited credit through the same channels? More important, this is not capital flight out of Russia. Why is the Central Bank trying to control foreign investment into the country? Instead of encouraging investment, this ridiculous regulation repels it.