In accordance with the general rule, provided by the Russian legislation, all monetary obligations shall be specified in the national currency, what is directly set in Article 140 of the Civil Code of the Russian Federation. At that the parties may specify in the contract that the monetary obligation, which shall be paid in rubles, may be nominated in its equivalent in foreign currency or even standard units. Artcile 317 of the Civil Code of the Russian Federation stipulates such possibility, which is mainly designated for decrease of currency risks.
Currency Clause Concept and Use
Traditionally, the need to agree upon currency terms and conditions of a transaction is associated with foreign trade contracts. Thus, international contract parties must reach an agreement on the definition and fulfillment of liabilities. In this case, they use such concepts as currency of price (scope of liabilities), currency of payment (way of fulfillment of liabilities), conversion terms if the currency of price and currency of payment are different, as well as the currency clause. The latter means a provision of a contract the main purpose of which is to reduce potential currency risks associated with the currency rate mismatch at the date of approval of the transaction terms with the exchange rate at the date of the transaction payment.
It is worth noting that the need to agree upon the currency clause occurs not only in foreign trade contracts, but also in contracts between Russian business entities.
According to the general principles of the Russian civil law, all liabilities must be expressed in the national currency which is provided for by Article 140 of the Civil Code of the Russian Federation. In this case, it is possible to incorporate into a contract a provision that the liabilities, payment of which must be made in Russian rubles, can be expressed in the equivalent amount in a foreign currency or even in conditional currency units. It means that the amount of liabilities is determined at the official rate of the relevant currency or conditional currency units. A possibility of including such provision into a contract is also directly expressed by the Russian applicable laws (Article 317 of the Civil Code of the Russian Federation) and is mainly intended to balance interests of the contract parties.
It often happens that Russian entrepreneurs resort to the currency clause when entering into supply contracts or commission contracts for purchase of imported goods, long-term lease agreements, loan agreements. Depending on the currency clause scope, it may serve both to protect against the national currency devaluation, and to reduce the inflation risk, including in long-term contracts.
The very concept of a currency clause is included into Regulations No. 446-П of the Central Bank of the Russian Federation dated December 22, 2014, under which a currency clause means a provision that a requirement and/or an obligation shall be complied with/fulfilled in the agreed currency, i.e. in the currency of the obligation, but in the amount equivalent to a certain amount in another currency, i.e. an equivalent currency, or standard units at an agreed rate.
In this case, it is possible to incorporate both a unilateral clause, i.e. insurance against a risk of one of the parties (either only the lender or only the debtor), and a bilateral clause providing for insurance of both the lender and the debtor. Moreover, there are several types of currency clauses depending on their scope. As practice shows, most commonly business entities use implied or express currency clauses. That is why we will take a closer look at them.
Implied Currency Clause
The so called implied currency clause is used when a contract currency and payment currency differ. That is, payments under the contract are made in the national currency, for instance, in Russian rubles, and the amount of liabilities under the contract is fixed in another currency, and such another currency must qualify for stability and be widely used in international payments.
In other words, it is convenient to resort to the implied currency clause when negotiating transactions wherein the goods price is clearly fixed in one of the currencies widely used in international payments or depends on the currency of the goods’ country of origin. It is advisable in respect of the ETC (exchange-traded commodities), for instance, oil or grain. Russian importers often use this method of agreement of terms and conditions as well, when importing goods to the Russian Federation, which are not produced in our country.
Another «favorite» trick of using the implied currency clause is its inclusion in long-term contracts between Russian business entities (lease and loan agreements). Agreement of the implied currency clause will secure against fluctuations of the national currency rate and will help implement the contract in accordance with the actual value of liabilities as at the date of agreement upon the terms and conditions of the transaction.
Express Currency Clause
The express currency clause is generally used in transactions if the currencies of price and payment coincide. It is logically that it is most frequently used in foreign trade contracts. And it is necessary to take into account that both contract parties are protected against currency risks simultaneously in case of agreement upon the terms and conditions of the express currency clause.
When defining terms and conditions of the express currency clause, the contract currency is correlated with another currency, which is harder, and correlation of such currencies shall be specified upon signing of the contract. Generally, the contract shall contain a provision stating that if such correlation is changed, the amount of payment shall be changed as well on a pro rata basis. For instance, the express currency clause may have the following wording: «The goods price and payment shall be established in USD. If, as at the date of payment, the USD/Euro rate is changed as compared to the rate at the effective date of the contract, the contract price and payment amount shall be changed accordingly».
It is important to mention that different types of currency clauses meet entrepreneurs’ interests in case of a standard change of the currency market environment, but they are always capable of protecting against abrupt critical jumps of currency rates.
How to Qualify Currency Rate Changes?
It is worth noting that the different regulations on governing the currency terms are widely spread in the international practice, but are not duly reflected in the Russian law at all. Frequently, disputes are settled by contact parties in a court of law only. Therefore, in order to protect their rights, entrepreneurs affected by adverse consequences of the currency rates fluctuations often resort to the statutory provisions regarding the significant change of circumstances and force majeure circumstances.
As set forth by Article 451 of the Civil Code of the Russian Federation, the significant change of circumstances, which the parties relied on when making the contract, is a reason for its amendment or termination. That is why in the situation of economic crisis the participants of business intercourse shall consider the question of possible application of the legislative norms as an option for protection from the arisen currency risks.
In other words, business entities have reasons to suppose that the national currency devaluation may be the very significant change of circumstances that the parties relied on when making the contract.
The legislative and regulatory compliance practices regarding this issue have been rather ambiguous for a rather long period of time. Currently, we can draw a conclusion that the change of the economic situation and, as a consequence, change of the currency rate may not be considered to be the circumstance the contract parties may refer to in accordance with Sub-clause 1, Clause 2, Article 451 of the Civil Code of the Russian Federation. Courts believe that, since the parties could foresee it at the time of entering the contract, such circumstances and their consequences are covered by the entrepreneurial risk. The conclusion is also confirmed by Resolution No. 54 of the Plenum of the Supreme Court of the Russian Federation dated November 22, 2016, On Some Issues due to Application of General Provisions of the Civil Code of the Russian Federation on Obligations and Fulfillment Thereof.
It is also worth noting that the violent fluctuation of the currency rate cannot be recognized to be a force majeure event (Clause 3, Article 401 of the Civil Code of the Russian Federation), as the currency rate changes, even significant ones, are not of extraordinary and insuperable nature. The judicial practice regarding this disputable issue is also well-established.
Effective Wording of Currency Clauses
As the foreign currency rate to the Russian ruble can fluctuate both upwards and downwards, it is extremely important for the contract parties to agree upon the date when the currency rate is calculated for the purposes of the obligation fulfillment, apart from the agreement of the currency clause itself. Such dates may be the effective date of the contract; date of actual payment; date of provision of services, date of actual shipment of goods, etc.
For the purpose of the most efficient use of the currency clause, the contract parties are recommended to agree upon a price review clause or to establish the so-called «currency branching». The wording may be as follows: «Should the Russian ruble/Euro rate change exceed Five (5) percent at the date of payment, the amount of payment shall be changed pro rata the change of the Euro/Russian ruble rate at the date of such payment». Another example: «Payments hereunder shall be made in the ruble equivalent in USD defined at the rate of the Bank of Russia at the date of payment but shall not be less than Sixty (60) Russian rubles and shall not exceed Seventy (70) Russian rubles per One (1) US dollar».