Due to the malaise in the Russian economy – inflation was 200% per annum last year, but may fall to 100% per annum this year – and the falling exchange rate, it is illegal to use any other currency in Russia other than the rouble. This sanction was brought in on 1 January 1994 and enforced rigorously. The payer and payee in the transaction both get fined for paying and receiving any foreign currency. The Grand Hotel Europe, where Prince Charles stayed on his recent trip to St Petersburg, has been fined US$17 million for currency violations.
Conversely, extracting money from Russia is not easy. The Russians like to see continual investment: for example, if the parent company purchases an asset for its Russian subsidiary, the repayment of these monies is tricky to negotiate as they don’t represent a third party liability of the Russian company. The art is to enter into the contract directly between the Russian subsidiary and the supplier, but in practice people aren’t too keen on getting paid in roubles. Even the taxi drivers will only accept dollars, which is illegal for you to pay and them to receive.
Another interesting quirk to the system is the Russian banking system – or lack of it. There are no cheques in Russia, just bank payment requests. While it is your money sitting in the bank, you can only request for a payment to be made on your behalf. If this request isn’t backed up by the original invoice which is being paid, then it can be refused. For example, , if I want to give you 10,000 roubles because I like you, this is not a valid request. There is no invoice to attach to it, therefore no payment will be made – tough!
Cashflow forecasts can be difficult and unpredictable.
Three days to receive cleared funds in England may seem a long time but at least it is predictable. As monies can take from one week to four weeks to clear, to some extent your cashflows are guesstimates. However, a lot of the predictability about Russia is that it is unpredictable. There are no yearly budgets advising you of forthcoming tax rises and spending forecasts. These come in the form of presidential decrees which are not necessarily announced before the tax rise takes place!
The announcement was made 14 days after the tax rise took place...
President Yeltsin recently brought in a federal tax of 3% on enterprises and organisations. This is calculated and paid in the same way as VAT, but not called VAT although it effectively increases the VAT rate to 23%. This presidential Decree was signed on 24 December 1993, published in the second week of January 1994 and took effect from 1 January 1994. In addition, there are federal taxes, local government taxes, profits tax, tax on wages (leviedif you pay your employees more than six times the State minimum wage), property tax and so on. Russia is a fascinating place to explore, interesting to work in and mind-boggling to account for. Russian management accounts are prepared in roubles each month on a basic income(everything received, not receivable) and expenditure (capital and expenses) basis. VAT is paid on the fourteenth of the following month on the dot or the Russian tax police (who carry firearms) come and collect it from you. The equivalent of corporation tax is paid quarterly based on the quarter’s excess of income over expenditure.
These accounts are then ignored for our management accounts which are prepared in accordance with UK accounting principles. The management accounts are then incorporated in the holding company’s accounts. As the holding company is still in its start-up period, our accounts are again altered (under Canadian GAAP the bulk of the expenditure can be capitalised in the year-end group audited accounts).
As the Russian management accounts, UK management accounts and Canadian year-end accounts are all prepared from the same raw data conforming to the local accounting standards, but all have totally different net profits, the phrase ‘Lies, damned lies and statistics’ often comes to mind.
Chris Wilkins FCCA is a partner in Wilkins Southworth, registered auditors.