25 Mar 2015
NEW REGULATION REQUIRES LETTER OF CREDIT FOR EXPORT OF PRODUCTS FROM NATURAL RESOURCES

The Minister of Trade issued Ministerial Regulation No. 04/M-DAG/PER/1/2015 (“Regulation No. 4/2015”) on 5 January 2015. Regulation No. 4/2015 comes into effect from 1 April 2015.

Regulation No. 4/2015 applies to the export of the following prescribed products;

1. Coal;
2. Unprocessed or partially refined Minerals including;
   oIron concentrate;
   oCopper concentrate;
   oLead concentrate;
   oZinc concentrate;
   oAlumina;
   oNickel;
   oSilver;
   oGold;
3. Crude oil;
4. Liquefied Natural Gas;
5. Crude Palm Oil.

Once in effect, Regulation No. 4/2015 will require Indonesian exporters of the prescribed products to obtain a Letter of Credit from their product buyer for an amount equal to the value of the prescribed products sold prior to the export of the prescribed products.

The Letter of Credit must be received by an Indonesian foreign exchange bank.

The prescribed products cannot be exported without a Letter of Credit in compliance with Regulation No.4/2015.

The Minister shall appoint surveyors to confirm that a Letter of Credit has been received by the Indonesian exporter for the value of the prescribed products sold for the equivalent of (or greater than) the “world price” for the prescribed product. The surveyor shall issue a report which is to be provided to certain government agencies including Bank Indonesia and the Ministry of Finance (but not the Director General of Tax). The prescribed products cannot be exported without the surveyor’s report.

Exporters who do not comply with Regulation No.4/2015 may be subject to sanctions. The sanctions are not specified in Regulation No.4/2015 but may ultimately to suspension or revocation of their export and production licenses for ongoing violations.
Regulation No.4/2015 is subject to further implementing regulations (which have not yet been issued).

The Minister of Trade issued a similar regulation in 2009 (although the range of prescribed products included more agricultural commodities and less minerals and did not include oil & gas). The Minister of Trade revoked the regulation in 2010 stating that at that time, Indonesia’s foreign exchange reserves had improved and the regulation was no longer required.

The stated purpose of Regulation No.4/2015 is to “optimize and accurately record foreign exchange derived from exports while maintaining the stability and improvement of prices of exports”.

Regulation No.4/2015 does not include any transitional provisions so it appears actual export deliveries of prescribed products after 1 April 2015 will need to comply with the Regulation, even though the sales may be subject to a long terms sales contract entered before the enactment of Regulation No.4/2015.

Similarly, Regulation No.4/2015 requires the Letter of Credit to be issued for at least the “world price” of the prescribed product but the Regulation does not define the term “world price”. One of the major export products subject to Regulation No.4/2015 is coal and the Government of Indonesia has its own “Indonesian Benchmark Price” for coal on which royalty is to be calculated and paid, however, it appears the pricing for coal for the purposes of Regulation No.4/2015 is “world price” and not the “Indonesian Benchmark Price”.

Regulation No.4/2015 also does not recognize that there may be many valid reasons for an exporter selling a prescribed product as less than “world price”. For example, if a buyer makes advance payments to an exporter or if a buyer commits to a long term supply contract with an exporter. (by: Philip Payne)