Since 24 February 2022, when Russia launched its illegal full-scale invasion of Ukraine violating the very essence of international law and common values of humanity, life for millions of Ukrainians has dramatically changed. Since then, our country has been facing enormous challenges both in public and private sectors, which, inter alia, includes the banking sphere. After a few months following the outbreak of the war, it became evident that stability of the banking and finance system is a crucial guarantee of national security. The case in Ukraine shows how quick, decisive steps of the state may effectively tackle the consequences of war and facilitate functioning of the economy even in times of full-scale war. In this article we discuss (1) the measures taken by the National Bank of Ukraine (the “NBU”) aimed at ensuring stability of the Ukrainian banking system, and the results of those, (2) debt restructurings, including that of Eurobond debt, and (3) other banking and finance-related issues stemming from consequences of war.
On the one hand, the NBU had to prevent a high outflow of funds from Ukraine, address the economic obstacles Ukrainian banks had faced (mass withdrawal of funds from bank accounts, especially from saving accounts, loan defaults, reductions in the number of customers, etc.), to prevent widespread bank insolvency. On the other hand, it had to facilitate the operations of the financial sector in order to enable due provision of payment services, loans and guarantees, and other banking services that support economic relations. Therefore, the NBU was tasked to find a balance between conflicting interests and establish proportional limitations on bank-related transactions.
Subsequently, the NBU has succeeded in championing the banking system by implementing the extraordinary measures discussed below.
On 24 and 25 February 2022 the principal measures were taken, some of which were subsequently eased or otherwise evolved, which is naturally a continuous process.
Moratorium on cross-border payments. Initially, practically all cross-border payments out of Ukraine, including payments under cross-border loan agreements, were prohibited, save for payments in favour of international financial institutions. Subsequently, the NBU extended the list of exemptions. Currently, those exemptions include, inter alia: (a) settlements for imported goods and services specified by the Cabinet of Ministers of Ukraine (e.g., payments concerning transportation services, storage of goods in warehouses, telecommunication services, cloud services, programming, Internet platform subscriptions, acquisition of proprietary intellectual property rights, legal services, audit and tax consulting services, etc.)3; (b) settlements with international financial institutions; (c) payments with funds loaned from an international financial institution; (d) domestic government bonds redemption; (e) P2P payments, payments for cryptocurrency, e-money acquisitions, and some others if the total of such payments does not exceed UAH 100,000 (approximately EUR 2,500) per month.
It should be noted that loan repayments under loan agreements with foreign lenders (other than payments to international financial institutions) have been limited to interest payments. Moreover, currently only interest accrued in the period between 24 February 2022 to 10 August 2022 may be repaid.
Fixed official UAH to USD exchange rate, which is currently UAH 36,5686 to USD 1.
Encouraging non-cash payments. The NBU urged resident banks to maintain the functioning of payment systems. The use of payment cards has been encouraged, and the NBU has also extended the validity of payment cards.
Refinancing loans for maintenance of banks’ liquidity. As mentioned, Ukrainian banks faced several economic difficulties caused by the war, which make the compliance with bank liquidity requirements much more difficult than it had been before the invasion. For this reason, the NBU offered banks to take one-year refinancing loans subject to an 11% interest rate. In the period between February 2022 and February 2023, the NBU provided Ukrainian banks with refinancing loans in the amount of UAH 96.8 billion (approx. EUR 2.4 billion).
Ultimately, the NBU has prevented mass bank insolvency and maintained the stability of the financial sector of Ukraine’s economy. At the time of writing, no resident bank had been involved in insolvency proceedings since February 2022.
Nevertheless, the negative consequences for the economy of Ukraine, including both private businesses and state-owned companies, and the Ukrainian government, has been enormous, which naturally has resulted in several debt restructurings.
Eurobond debt restructuring. The Ukrainian government has also tackled the economic consequences of war by, inter alia, implementing Eurobond debt restructuring. On 15 July 2022, the Cabinet of Ministers of Ukraine suggested postponing Eurobond redemption dates for two years.Eurobond holders were asked to agree on the amendment of loan terms, thus, postponing both the interest repayment date and redemption date for two years. During the two-year period, interest will continue to accrue as stipulated in the respective Eurobonds prospectuses.
Private companies. As a result of the war, many Ukrainian businesses have been forced to leave their property, relocate, and consequently lost both assets and sources of revenue. For instance, many renewable energy companies were located in the south of Ukraine, where massive military campaigns have occurred. A number of companies were forced to suspend their business operations and seek other premises in Ukraine in which to operate. Some companies with assets in unoccupied territories have managed to achieve debt restructuring; however, most such restructurings were simply of the ‘amend-and-extend’ type of quick restructurings.
Sovereign financing. As a result of the war, Ukrainian economy fell by roughly 30% in 2022, while the level of spending on the war and humanitarian needs, repairs of the energy and other infrastructure has rocketed. Due to the unified position of the allies, Ukraine has been receiving necessary funding to cover the financial gap from the US and the EU, either directly or through international financial institutions. For example, the World Bank has mobilised USD 18 billion of financial support since 24 February 2022. This includes: supplemental budget support of USD 350 million, bilateral guarantees of USD 134 million, bilateral grant financing of USD 1,168 million, emergency public service support of USD 1,000 million, bilateral guarantees of USD 1,521, bilateral grant financing of USD 10,455 million and World Bank Lending (Restructuring and Current Portfolio) of USD 635 million.
IFIs. Given the war and the payment moratorium, practically all private financings have stopped, other than those from international financial institutions, particularly the European Bank for Reconstruction and Development (the “EBRD”). Since the outbreak of the war, the EBRD has launched comprehensive financing projects aimed at supporting Ukrainian banks, manufacturers, service providers, agribusinesses, natural resources and energy businesses, and others. During 2022 the EBRD deployed EUR 1.7 billion of investment in Ukraine. This included, inter alia, emergency liquidity for Ukrainian railway and electricity companies, and support for Naftogaz. By the end of 2023, the EBRD plans to invest EUR 3 billion in Ukraine’s economy. The financing will be aimed at ensuring due operation of vital state companies, in particular, Naftogaz, Ukrenergo, Ukrzalyznytsya, a railway company, and launching recovery programmes to rebuild infrastructure and restore life in Ukrainian cities, which have greatly suffered during the war. Redcliffe Partners has assisted the EBRD with a number of financings in Ukraine since the war began. For instance, in June 2022 we advised the EBRD on the provision of a EUR 24 million short-term unsecured loan to a Private Joint-s Stock Company, “MHP”, the leading Ukrainian poultry and grain producer, to finance working capital needs for its crop farming operations in Ukraine. Also, we have been actively engaged in structuring risk-sharing agreements between the EBRD and Ukrainian banks, which enable the latter to share the risk on their loans to Ukrainian companies. In May 2022, we advised the EBRD in connection with risk-sharing instruments provided to ProCredit Bank, OTP Bank, OTP Leasing and Credit Agricole within the Food Security Guarantee Programme. The EBRD undertook to cover more than half of credit risk arising out of financing provided by the banks up to EUR 50 million.
Another example of new financings contemplated from international finance institutions are those planned by International Finance Corporation, which on 15 December 2022 announced a new USD 2 billion financial package to restore the resilience of the private sector and support livelihoods, the so-called “The Economic Resilience Action Programme” (the “Programme”). The Programme will focus on ensuring access to critical goods and services (support for agribusiness and trade finance), sustaining economic activity, supporting crucial infrastructure (e.g., trade routes), and satisfying the needs of displaced people and affected municipalities by the direct or indirect financing of Ukrainian companies and/or providing them with guarantees.
At present a very rough estimate of damage caused to Ukraine by the war and the cost needed to rebuild Ukraine is some USD 1 trillion, an enormous amount of money that will require sourcing from multiple parties. The main sources to build up such funds should include (i) reparations from the aggressor state, including those assets currently frozen by the West, (ii) sovereign financings, including various fundings through the World Bank, and (iii) private funds. To achieve the foregoing, a new ‘Marshall Plan’ is currently being contemplated.
There are considerable theoretical discussions about the difficulties of obtaining the frozen assets based on the argument of the inviolability of private ownership and sovereign immunity. As Tim Ash has noted: “It’s not an attack on private property rights – Russia is the state destroying property, stealing land and property and literally driving a tank thru private property rights.” Politicians and legislators in relevant jurisdictions are working now on the removal of legal barriers to confiscating the frozen assets in order to compensate Ukraine.
There is a general consensus that the aggressor’s frozen assets and sovereign funding from the ally states would not be sufficient without private capital. Representatives of Black Rock, JP Morgan, Goldman Sachs and other private financial institutions have already expressed interest and willingness in participating in financing the rebuilding of Ukraine.