Over the years Ukraine has been known as a country with restrictive currency control regulations. Historically, these have been aimed at limiting the flight of capital out of the country and maintaining the stability of Ukraine’s local currency, the hryvnia (UAH).
Recent events related to the annexation of part of Ukraine’s territory and military activities in eastern regions of Ukraine put huge pressure on Ukraine’s economy and on the hryvnia. In response to these challenges (including currency market turbulence), in 2014 the National Bank of Ukraine (NBU) tightened the currency control regime further by introducing so-called “temporary” currency control measures.
The NBU has issued a handful of resolutions almost every three months since then, extending the “temporary” restrictions, each time with certain modifications, including, most recently, NBU Resolution No. 342 dated June 7, 2016 (“Resolution No. 342”). As part of these measures, the NBU has imposed quite a few limitations on local currencymarket players, including limitations on the right of individuals to purchase foreign currency and withdraw funds from their bank accounts, shortening the maximum period for settlements under export and import operations of Ukrainian residents, and requiring banks to sell foreign currency proceeds received by their clients on the Ukrainian interbank market. At the same time, some of the NBU’s temporary measures have also impacted foreign lenders and other investors in Ukraine.
Cross-Border Loans
In March 2014, the NBU imposed an absolute prohibition on making early repayment of any amount under cross-border loan agreements. A few exceptions to this prohibition followed later on, primarily to allow prepayments to international financial institutions as well as of loans supported by foreign export credit agencies (ECA).
In August 2015, the NBU introduced a ban on changes to lenders and/or borrowers under cross-border loan agreements. For some time, this prohibition hindered any restructuring efforts involving assignments or similar arrangements. In January 2016, this prohibition was replaced with a new cross-border loan-registration procedure involving additional scrutiny from servicing banks and the NBU. The new procedure has not yet been properly tested, but it is clear that registration with the NBU of new lenders/borrowers will now require additional time and effort.
Repatriation of Dividends and Other Payments
Generally, since September 2014, the NBU has prohibited the payment of dividends out of Ukraine, the repatriation of proceeds from sale of equity interests in Ukrainian companies and debt securities of Ukrainian issuers. This has made it impossible for foreign investors to repatriate their investments out of Ukraine and has affected the structuring of M&A transactions in Ukraine. The NBU also restricted cross-border payments under most types of individual licenses issued by the NBU.
Move Towards Liberalization
With signs that the hryvnia may be stabilizing, the NBU currently appears to be on the way to gradually easing these temporary restrictions. In particular, in May-July 2016 the market saw a series of NBU resolutions relaxing some of the restrictions. Most importantly, pursuant to Resolution No. 342, the NBU now allows foreign investors to repatriate dividends accrued in 2014 and 2015, subject to a monthly-capped amount. In addition, foreign currency proceeds under ECA-supported loan agreements and proceeds transferred into Ukraine as foreign investments have been exempted from the mandatory foreign-currency sale requirement. The foreign-currency sale requirement itself has now been reduced from 75% to 65%. The NBU has also extended the maximum term for settlements of export and import transactions from 90 to 120 days.
Although certain other temporary currency restrictions previously introduced by the NBU still remain in place, the signs of liberalization marked by recent NBU steps should add more freedom to cross-border transactions and have a positive effect on the business environment in Ukraine.