On 7 February 2019, new currency control legislation came into effect in Ukraine. Given that the NBU subsequently introduced further relaxations, as well as issued several clarifications, we have updated our briefing note.
The former currency control regime was based on the principle that all currency transactions, save for a few exceptions, required an individual licence from the National Bank of Ukraine (the "NBU"). The new currency control legislation makes a long-awaited shift toward the principle that all currency transactions are permitted unless expressly restricted by law. In parallel, the liberalisation of the currency control regime will, in effect, be accompanied by the tightening of financial monitoring and tax legislation, such as through BEPS and similar measures.
The relaxation of currency control is being introduced gradually and with caution, in order to preserve the financial stability of the country. Some of the restrictions will likely be lifted only upon Ukraine adopting the contemplated BEPS measures. As a result, some restrictions have already been completely cancelled, some have been modified and significantly simplified, while others have been retained for the time being.
Restrictions which have been Abolished and/or Modified
Amongst the most important developments introduced by the regulations are:
- Extended term for settlements under export/import contracts. Extension of deadline for settlements under export/import contracts from 180 to 365 days, and mitigation of sanctions for breach of deadline. The deadline was cancelled with respect to export service contracts (other than insurance and transportation services), export of IP rights and certain other export/import contracts.
- NBU licensing/NBU caps. Abolition of individual NBU licences and replacing them with a general cap (limit) for cross-border payments, being EUR 2,000,000 per year for legal entities and EUR 50,000 for individuals, but subject to a number of exemptions from this limitation, including:
- settlements under export/import contracts
- payments under guarantees, suretyships and pledges with respect to obligations of Ukrainian borrowers and reimbursement operations thereunder
- payments under leasing, factoring, insurance/reinsurance, and lease agreements
- payments under loan agreements, including from offshore accounts
- repatriation of foreign investments, including payment of dividends (for which separate caps are established, as mentioned below) payments to international financial institutions with which Ukraine is either a member or has signed bilateral treaties.
Payments subject to a cap will be monitored by Ukrainian banks and released subject to their compliance with the cap.
- NBU Registration. Abolition of registration of cross-border loans with the NBU and replacing it with a notification procedure via a Ukrainian bank servicing a cross-border loan. Basically, a cross-border loan will need to be notified by a borrower to its Ukrainian servicing bank (together with submission of the loan agreement). That bank, in turn, shall within five days record the particulars of the loan in the electronic information system maintained by the NBU. The NBU is no longer involved in the review of loan documentation and performs solely electronic system maintenance functions. The notification may need to be updated if certain terms of the loan (such as principal amount, final maturity or other particulars previously recorded in the electronic system) change. In practice, the notification is undertaken very quickly and is quite straightforward.
- Cost of funding cap. Abolition of the maximum interest rate (cost of funding cap) applicable to cross-border loans, and its replacement with general financial monitoring by a Ukrainian servicing bank for payments under cross-border loans in terms of pricing on an arm's-length basis and corresponding to prevailing market conditions. A servicing bank, when considering if the pricing is consistent with market conditions, should take into consideration the following components: (i) a base component reflecting the existing cost of funding in corresponding currency on the international market (e.g. LIBOR/EURIBOR for floating rates, or a refinancing rate quoted by a central bank in a jurisdiction of the respective lender); (ii) an additional margin reflecting the sovereign credit risk of Ukraine; and (iii) the individual risk of a particular borrower.
- Early prepayment. Abolition of a ban on early prepayment of all cross-border loans.
- Accumulation of foreign currency onshore. Express permission for borrowers to buy and accumulate foreign currency in the amount necessary and up until the next scheduled repayment date on their onshore accounts in order to service the debt under cross-border loans. In case of bullet repayment at the final maturity date, accumulation should be possible in the amount of the entire outstanding debt.
- Accumulation of foreign currency offshore. There is no prohibition for the borrowers to buy, transfer and accumulate foreign currency on their offshore accounts provided that accumulated currency is further used to service the debt under cross-border loans and also provided that the accounts are not opened in certain offshore jurisdictions (such as BVI, the Isle of Man, Andorra, etc.) or Russia.
- Hedging. Certain types of hedging (e.g., by entering into forwards with Ukrainian banks) of FX risks under cross-border loans are allowed.
- Bank accounts in Ukraine for foreign entities. Possibility for non-residents to open current accounts in Ukraine in any currency.
Several restrictions will be maintained, with the intention being to gradually lift these in the future, amongst which the most notable are:
- Mandatory conversion of foreign currency at the level of 30%
- Cap on the repatriation of proceeds from sales of securities, corporate rights, reduction of share capital and exits from Ukrainian companies, in the amount of EUR 5,000,000 per month
- Cap on the repatriation of dividends declared up to the end of 2018 (inclusive) in the amount of EUR 12,000,000 per month
- Making investments abroad subject to an annual EUR 2,000,000 cap for companies and EUR 50,000 for individuals
- Dedicated foreign currency purchase principle, which means that foreign currency can be purchased only for a specific purpose and should be applied to such purpose within 10 days following purchase
- Prohibition on purchasing foreign currency for the account of loan proceeds
- Provision of loans to non-residents subject to a EUR 2,000,000 cap.
NBU Anti-Crisis Measures
The NBU is still entitled to introduce temporary (i.e., lasting up to 12 months) protective measures in case of unstable financial conditions in the banking system or other adverse events posing a threat to Ukraine's financial stability.
We note that it remains to be seen how most of the above-mentioned developments will work in practice and be interpreted by the NBU and Ukrainian banks responsible for conducting currency control and financial monitoring.