Limitation on Foreign Participation is Unclear - International Law Office

Russian law has traditionally limited foreign equity participation in the capital of the Russian banking industry to 12%. However, a revision of the Russian Banking Law, which was passed in 1996, now provides that these limits may only be imposed by a special federal law (the existing ceiling does not have the force of a federal law). This casts some doubt on the 12% limitation, although it has been often cited by the Russian Central Bank (CBR) as valid. However, CBR representatives also stated that this limit had been exceeded, and at some point foreign participation reached as much as 20%.

The situation became even more confusing after the August 1998 financial crisis, after which the Russian banking industry was effectively reduced to an aggregate negative valuation. The repercussions of the crisis still persist. So far, it has induced the CBR not to restrict foreign ownership of Russian banks, but rather to take a more liberal approach to foreign investment in the Russian banking sector, which is viewed as a source of funds.

Despite the traditional position of the CBR on the quota issue, some CBR representatives have taken the position that the foreign quota has not been exceeded. Moreover, the CBR has recently been discussing the introduction of a 20%-25% quota to replace the 12% ceiling. Because the higher percentage has not yet been reached, the issue is not considered to be urgent. However, the lack of clarity permits the CBR to reverse its position at any time and start enforcing the 12% limitation once again whenever it sees fit.

For further information on this topic please contact Laura Brank at Chadbourne & Parke by telephone (+7 095 974 2424) or by fax (+7 095 974 2425) or by e-mail (lbrank@chadbourne.com).

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