How can international banks operate

International banks (irrespective of their jurisdiction of incorporation) may operate in Russia either through representative offices (predstavitelstva) or as subsidiaries.

A representative office forms part of the same legal entity as its head office. Representative offices are not allowed to perform any banking operations (such as attracting funds on deposit, opening and maintaining bank accounts, lending money etc.) in Russia. Aa representative office’s permitted activities are generally limited to marketing and collection of local data on behalf of its head office. Although there is no exact publicly available information in respect of the number of representative offices of international banks opened in Russia, it is generally understood that a representative office is a rare form of operation for an international bank in Russia due to its limited permitted functionality.

In contrast, a locally registered banking subsidiary constituting a separate legal entity from its head office is the most common form for international banks to establish a presence in Russia. On the basis of the official information of the Central Bank of Russia (CBR), as of 1st December 2014, there were 228 credit organisations (i.e. both banks and non-bank financial institutions) with foreign participation registered in Russia.

Russian subsidiaries of international banks will generally be treated in the same manner as local banks owned or controlled by the Russian state or Russian companies or individuals - they will be subject to the same licensing/regulatory requirements established by the Russian legislation and implemented by the CBR.

What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?

Opening a representative office

A representative office of an international bank will be entitled to carry out its permitted activities in Russia (referred to in paragraph 1 above) from the date of its accreditation by the CBR. In order to qualify as an acceptable applicant for such accreditation, an international bank must have a five-year track record of banking activities in the country of its incorporation on the basis of the licence (permit) issued by the relevant regulator in the home jurisdiction of the bank. Please note that documents required to be filed with the CBR as part of the accreditation process include, among others:

  • a written consent of the regulator of the country of incorporation (registration) of the relevant bank to the establishment of such bank’s representative office in Russia, or a letter issued by such regulator confirming that such consent is not required, both consent and letter confirming the financial position of the relevant international bank; and
  • information in respect of the principal shareholders of the relevant international bank applying for accreditation (holding more than 10% of its shares), its governance structure, client base, branches, membership in international banking and financial organisations, and any collaboration with any Russian banks, investments in any Russian entities.

If, a result of the CBR’s consideration of the documentation and information presented and available to the CBR, it takes a decision to provide accreditation to the relevant representative office, the CBR will issue a certificate of accreditation for a term of no more than three years. Thereafter, the term of accreditation of the representative office may be extended on the basis of a separate request for the maximum period of three years each time.

Opening a subsidiary

International banks that consider opening a subsidiary in Russia are first required to obtain a preliminary consent of the CBR before any filings for registration and licensing purposes are made. When deciding on whether or not to grant an international bank with such preliminary consent, the CBR may take into account, inter alia, the following considerations:

  1. whether the quota for foreign participation in the Russian banking sector is exhausted. Federal Law No. 395-1 “On Banks and Banking Activities” entitles the Russian Government together with the CBR to introduce a quota for the foreign participation in the Russian banking sector. However, there is currently no such quota in effect;
  2. the financial position and business reputation of the relevant international bank;
  3. the order of receipt of the applications received by the CBR from non-Russian entities filed with respect to the above mentioned preliminary consent;
  4. the status of the political relations between Russia and the country of incorporation of the international bank; and
  5. whether the international bank is incorporated in a jurisdiction with a favorable tax and customs regime.

An international bank applying for the preliminary consent will have to file a number of documents for this purpose. The relevant filing is required to include, among others:

  • a written consent of the regulator of the country of incorporation of the international bank to such international bank’s participation in a bank to be established in Russia, or a letter issued by such regulator confirming that such consent is not required, and
  • documentation evidencing the financial position of the relevant international bank (including financial statements of the international bank for the last 3 years); this effectively means that the international bank must have been existing and operating for at least 3 years before the relevant filing with the CBR.

Given that incorporation of a Russian bank is a document intensive process taking significant time and effort, international banks in the past have often opted for establishment of a presence in Russia through acquisition of shares in an existing Russian bank that already holds relevant licenses.

Is resolution an important factor in your supervisor’s determination of a branch?

Resolution, being a set of measures that authorities are entitled to undertake in order to prevent the failure of an entity which may potentially endanger the health of the whole financial system of the relevant country, is not applicable to the representative offices as those are, effectively, not engaged in any banking activities in Russia.

Russian subsidiaries of international banks (as well as other Russian banks and other types of credit institutions), in contrast, may be subject to measures similar to those described above. Such measures are regulated by the Russian bankruptcy legislation (Federal Law No.127 “On Bankruptcy (Insolvency)” (Bankruptcy Law)) and are referred therein as measures for prevention of bankruptcy of credit institutions that may be taken in cases where Russian banks fail to comply with certain prudential and other requirements established by the Russian legislation.

Such measures mainly include:

  1. financial rehabilitation measures (such as implementation of recovery plans, procurement of financings provided to the relevant bank by its shareholders and other persons, changing the structure of assets and liabilities of the relevant bank, changing the management structure of the bank, adjusting the size of the charter capital of the bank and the own capital of the bank);
  2. appointment by the CBR of a temporary administration, a special body that is intended to take control over or participate in the management of the failing bank for a maximum period of 6 months; and
  3. reorganisation of the failing bank (by way of merger/consolidation).

In case the measures mentioned in items 1 and 2 above do not result in the financial position of the relevant bank and/or compliance with any relevant regulatory requirements being successfully restored, the CBR may revoke its license and shortly after that liquidation proceedings will be commenced in respect of such bank.

What are the regulatory reporting requirements placed on branches?

As far as local subsidiaries of international banks are concerned, they are required to uphold the full reporting and prudential requirements prescribed for all banks registered in Russia.

Due to the limited capacity of representative offices of international banks, the supervision exercised over them is limited, and mainly manifests itself in such representative offices’ obligation to provide the CBR with semi-annual reports on their activities, and mandatory annual on-site inspections by the CBR’s officials. In case such inspections result in the identification of any breaches of the relevant Russian legislation made in the course of operation of a representative office, the CBR will inform the head office of the relevant international bank of the relevant breaches.

Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?

As a matter of Russian law international banks may not conduct banking operations in Russia through their branches. At the same time, Russian law does not prohibit an international bank (being a part of an international banking group) to establish (invest in) a number of local subsidiaries that will each hold relevant banking license(s). It should, however, be noted that such subsidiaries being parts of “banking groups” (as defined on the basis of the Russian banking legislation) may be subject to additional control and supervision requirements from the CBR’s side.

Where can I find further information?