Cash & Liquidity ManagementCash ManagementNetting/PoolingTreasury Management in Russia: Is it Really That Complex?

Treasury Management in Russia: Is it Really That Complex?

Apart from foreign exchange (FX) management and financial forecasting, centralisation, straight-through processing (STP) and efficient reconciliation of operational and financial transactions are core issues for treasury managers. Regardless of country, the goals and requirements expressed by treasury managers are always the same. Besides, I have a strong belief that most of these requirements can be met in all countries – including Russia.

Even if many processes and regulations do not seem to be very streamlined and compatible with best practices in the rest of Europe, the US or Asia, I think the main challenge does not lie with local accounting standards (RAS), currency control or Cyrillic letters in central bank settlements. The main challenge is how to ‘think outside of the box’ and adapt best practices to local regulations in order to reach our goals. In Russia, we typically copy our technical set-ups from abroad. But, in most cases, there is too much focus on the product and the technical set-up instead of the goal we actually want to achieve.

The Russian treasury and cash management environment has seen pretty rapid growth over the past few years. Expertise in treasury and cash management, as well as product offerings within major Russian commercial banks, is improving very fast. And bankers in Russia are mentioning centralisation, STP and payment reconciliation more often in their meetings with customers.

Centralisation: Capabilities and Challenges

It is worth mentioning that centralisation of liquidity between Russian residents is much less complicated than pooling with non-residents. This is because of intra-company lending between non-residents and resident, not legal restrictions such as transfer pricing, thin capitalisation and withholding tax.

In Russia, transfer pricing, thin capitalisation and withholding tax are a natural part of intra-company lending like in most European countries and are based on the same principles with minor numerical differences. They should not come as a surprise to treasurers who are considering cash concentration or pooling in Russia.

When applying for cash pooling, the biggest challenge is documentation and control mechanisms required by legal entities. First of all, treasurers always have to keep in mind that, before setting up a cash pool solution, they will be asked to submit an inter-company lending agreement to the bank. Some banks can provide an example of similar agreements, which can be used as a template, so don’t hesitate to ask your bank for such support.

Second, it is worth mentioning that balance netting cash pools are not offered in Russia due to limitations on negative account balance between two banking days – usually core functionality of balance netting. The balance is netted without physical fund transfers.

Consequently, we only have sweeping, zero balancing or interest compensation (enhancement) methods left for consideration. In the Russian market, the most popular is either local sweeping or zero balancing. Surprisingly, the functionality of both services is similar to services offered by banks abroad. The company can define top-account and sub-account holders, set intra-day limits that will be applied to the transaction accounts, and even define the currency of cash pool, which is quite normal except for in Russia where payments between residents are allowed only in rubles (RUB). This means that cash pools in currencies other than rouble can be rolled out only if all members of this pool are non-residents. Due to this, 99% of all cash pools in Russia are therefore in RUB.

The next challenge is mixed cash pools, where residents and non-residents alike are netting their liquidity. Again, the complexity is not in the technology but in the legislation that defines necessary reporting for transactions between residents and non-residents.

Since cash pooling, particularly zero balancing and sweeping, is based on numerous fund transfers, any transfers made between non-residents and residents are subject to currency control. Currency control, from a processing point of view, is a rather inefficient way to monitor and report cash flows to non-residents and nothing indicates that this regulation will change in the short term. In practice, it means that every transaction must be approved by business documentation confirming the purpose of each payment. On top of that, required documentation must be submitted to the bank in a paper-based form that makes STP processing of sweeps between residents and non-residents almost impossible. ‘Almost’ impossible because it is still possible to sign a long-term inter-company lending agreement and use it as the basis for currency control – submitting it only once to the bank instead of every time transactions are made.

So, due to the currency control regulations, interest compensation or interest enhancement is one of the most popular methods of pooling that companies aim for. However, interest compensation and inter-company lending are not a must. Interest compensation is completely virtual and hence does not require following currency control operations. In addition, companies can link residents and non-residents together or mix different currencies.

My concluding recommendation in terms of cash concentration in Russia today would be to perform zero balancing with only residents in the pool, or interest enhancement if intra-company lending is not the goal. However, as I mentioned above, cash management in Russia is developing rapidly. I believe that in the next few years we can expect more sophisticated and efficient cash concentration solutions when dealing with cash management in Russia.

STP is Not the Dream in Russia Any Longer

Taking into account that the Central Bank of Russia (CBR) has five clearing cycles or shifts per day, the country is in a much better position than many of its European counterparts. In addition, a few years ago real-time gross settlement (RTGS) (locally called BESP) was launched in Russia. This allows banks to process real-time payments between themselves. In addition, several banks are starting to offer faster payment services to their customers. In terms of same-day payments within Russia, I have no concerns – as long as remitter and beneficiary are not located in Murmansk and Vladivostok. The many time zones in Russia complicate matters, which is mirrored in +1 or +2 value days.

From what I have written so far, you might be thinking that there are no challenges to achieving STP in Russia. This is correct, as long as you do not look to centralise domestic payments in a common cross-border shared service centre (SSC) or want to achieve STP for foreign payments.

The major issue adding complexity to payment centralisation is the mandatory usage of Cyrillic letters in domestic settlement. But again, this can be solved if the enterprise resource planning (ERP) system used by treasury is capable of translating payment information and the processing bank supports retranslation of received messages.

Processing foreign payments is usually very quick. It is STP from a technical point of view and most banks provide same-day value payments. Still, keep in mind the fact that same-day value is applied only after successfully passing the currency control. My conclusion to all this is that, before focusing on STP for payments, it is wise to consider how currency control can become more efficient.

Payment Reconciliation: Still Dependent on Remitter Precision

Efficient payment reconciliation in Russia is becoming increasingly important due to the fall in cash as the dominant payment method. In Russia, there is a wide network of special cash machines providing the possibility to pay invoices by means of depositing cash and entering mandatory information required by the machines. This is an efficient method for payment reconciliation because the invoice issuer receives the necessary information (e.g. invoice number) for proper reconciliation.

As I stated above, the dominance of cash is decreasing slightly and cash payments are being replaced by more secure and efficient payment methods. These are overall more efficient, but not always in terms of payment reconciliation due to the lack of a specific reference used for payment identification as a mandatory parameter in the payment order.

In the banking market, there are two kinds of services that help to automate payment reconciliation. One is based on recognition of a customer-specific reference in the payment details and another is based on an alternative beneficiary account number that is unique to invoice or customer and provided by the bank. Both solutions have their pros and cons but are good ways to at least partially solve reconciliation challenges until specific references become mandatory in payment orders and invoices.


To many, the Russian banking market seems to be rather turbulent. The main reason for this is the conflict between the many regulations adapted in the Soviet era, the well-educated and professional banking specialist, and the willingness to adapt best practices from abroad.

Luckily, the latter two dominate the scene. And despite political reluctance to improve the first obstacle, I believe that in the near future there will be many changes in favour of creating more efficient treasury management. The reason for this is that it is much easier to build something brand new, rather than changing or replacing legacy systems, rules and regulations.

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