The economy and the banking system of Ukraine in 2016 continue to be affected by the problems of 2014-2015. Hryvnia devaluation, aggression of the Russian Federation in Ukraine, insufficient corporate governance and the subsequent loss of confidence led to a deterioration of the banks’ loan portfolio. All the above-mentioned have caused an outflow of deposits, freezing or substantial limitation of lending, and currency fluctuations, which has negatively affected the financial standing of many Ukrainian banks. Due to rising negative debts, banks had to create significant reserves for active operations, which inevitably had a negative impact on the level of capitalization of banks. In 2014-2016 the number of banks decreased significantly. In early December 2016 only 97 banks still had a banking license as compared to 180 banks in early 2014 according to the NBU.

Although the situation is not so hard as it was in 2014 and certain positive symp-toms become apparent, it is still too soon to speak of abatement of the banking cri-sis. The Ukrainian banking system is currently in the middle of a reformation stage.

In December 2016, the NBU extended currency restrictions that have been effec-tive for more than two years. Although they have a temporary nature, their validity period has not been defined this time. Definitely, such restrictions should neither replace the reform, not be the reform itself. It is only swift actions of Ukrainian state authorities and regulators based on a comprehensive strategy that can bring the weakened banking sector of Ukraine back to health. Of course, the NBU and the government have succeeded in stabilizing the situation and even brought to life certain highly anticipated liberalizations. They include the liberalization in the market of importing services which implies the cancelation of price examination certificates by Derzhzovnishinform SE and the Ukrainian translation of the sup-porting primary documents, as well as removing barriers to export of services by the Law that became effective on December 3, 2016 making it legally possible to execute agreements by means of correspondence exchange and issue of invoices.

However, the NBU independently continues monitoring the currency transac-tions and may block any transaction the NBU believes to be risky, non-compliant with the law or posing a real or potential threat to legalization of proceeds from crime. As such, there is still much work to be done in order to put in place a mod-ern and sound banking system which is adequately supervised. In particular, it is highly important to complete the internal reform of the NBU to change their func-tionality and establish within the mentioned process a bank and an export credit agency for supporting small businesses. Also, it is the matter of priority to take measures allowing to cancel currency restrictions that foreign investors name among the reasons keeping them from entering the Ukrainian market. All these restrictions refer, among other things, to the (a) established maximum allowable 120-day period for settlements under export and import transactions, (b) effec-tive prohibition of early repayment of foreign currency loans to non-residents, al-though a debt-into-shareholder equity conversion is allowed, (c) mandatory sale of 65% of foreign currency earnings, (d) prohibition on dividends distribution for the period preceding 2014-2015 or in amounts exceeding USD 1 mln or 10% of the total amount of payable dividends during one calendar month, (e) prohibition on purchase and transfer of foreign currency for the purposes of returning abroad the funds received from sale of corporate rights in Ukrainian entities, corporate rights in Ukrainian entities, and funds received from Ukrainian entities’ capital reduction or as a result of withdrawal from participation in the same, (f) prohibition on pur-chase of foreign currency at the instruction of a resident company that has foreign currency funds held in current and deposit accounts in an amount exceeding USD 25,000.00 or an equivalent thereof in any other currency, with a few exceptions.

The concept of a new currency control regulation for 2017 approved by the NBU provides for elimination of those restrictions in the context of EU integration aimed at increasing the export potential of our country. It remains to hope that the mentioned will be implemented in addition to making structural changes in the banking system of Ukraine. All of this is important not only for restoring con-fidence in the banking system and its attractiveness to foreign investors allowing to solicit accounts, but also to ensure quality improvement and risk mitigation for banking services, a high level of protection for consumers and financial in-termediaries and to increase the role of the banking system in the sustainable economic growth of Ukraine.

Published: Kyiv Post Legal Quarterly, December 23, 2016