On 2 January 2019, the National Bank of Ukraine (NBU) adopted key resolutions that align existing regulations with the recently passed law “On Currency and Currency Transactions” (the “Currency Law”). While the Currency Law has dramatically changed and liberalised the Ukrainian currency market, its specific terms were not known until now with the new NBU resolutions, which shed light on the specific rules that will apply to currency transactions, movement of capital, cross-border trade, foreign investments and financial monitoring.
The new rules give far more freedom to business and individuals vis-a-vis capital flow, and represent great progress towards liberalising the market. This important step forward is expected to attract more investments into Ukraine and accelerate further economic growth. The resolutions will enter into force simultaneously with the Currency Law on 7 February 2019. Any restrictions set by the resolutions will remain in force until cancelled by the NBU, which has promised to gradually lift restrictions on the national capital market. Lifting these restrictions will facilitate the free flow of capital into and out of Ukraine, which will, however, very much depend on the macroeconomic situation in the country.
1. Cross-border lending
Notification instead of registration
No registration of cross-border loans with the NBU will be required in order to get debt financing from outside Ukraine. Instead, the bank servicing the loan simply must notify the NBU about the loan agreement upon becoming aware of it – either based on a borrower’s notice or when the first payment under the loan is serviced by the bank. Information on cross-border loans will be kept in a special NBU database. Loan payments can be effected by a servicing bank provided that it has all loan documentation and the terms are reflected in the NBU database. Thus, it is in the client's interest to inform its servicing bank about a loan prior to effecting any transactions thereunder and thereafter of the amendments in the essential terms of the loan documentation. All registrations and registration certificates currently in force will cease to be effective on 7 February 2019 and information will be automatically transferred into the database of the NBU.
Lifting the maximum interest rate cap and early repayment prohibition
No limitations on loan pricing will apply, and the maximum interest rate cap for all loan payments (i.e. fees, default interest, etc.) and applied for more than ten years will now be cancelled. Also, the prohibition on early repayment of loans has been lifted and loans can now be repaid at any time according to the terms of an agreement. Thus, parties will now have more flexibility in agreeing and implementing terms of financing in line with their commercial intentions.
FX funds accumulation for debt service
Resident borrowers will now be able to accumulate foreign currency on their current accounts provided that this FX is used for the repayment of cross-border loans. FX funds can be accumulated during a loan period and, if not used for loan payments, will be automatically sold by a servicing bank. This resolution broadens debt service coverage requirements standard in most financing, and will help borrowers hedge the currency fluctuation risk, none of which was previously broadly available.
2. Replacing individual NBU licences with e-limits
The individual licensing regime will now be replaced by a system of “e-limits”. Residents will now be allowed to purchase and transfer FX abroad each year in amounts of up to:
- EUR 50,000 for individual residents – to perform obligations of a resident under insurance contracts, making investments or crediting a resident’s offshore accounts; and
- EUR 2,000,000 for businesses – to conduct business activities.
E-limits will not apply to a range of transactions, which is exhaustive and includes, among others, payments under cross-border loans, export-import transactions, payments under security relating to a transaction not subject to e-limits (i.e. unlimited transactions). Thus, for these transactions, FX purchases and transfers will be possible above the e-limit with no additional authorisation necessary. Such changes will significantly simplify cross-border flow of the FX funds since businesses will no longer be obliged to follow time-consuming procedures to obtain individual licences from the NBU with their numerous requirements and formalities. At the same time, it appears that payments exceeding e-limits under a transaction other than for unlimited transactions will not be possible.
3. Liberalisation of the bank account regime
Under the new regulations:
- resident businesses will no longer be required to obtain an individual NBU licence to use their offshore accounts (i.e., to credit and withdraw funds) subject to e-limits; and
- non-resident legal entities will be entitled to open FX and UAH current accounts in Ukraine, which will expand the range of payments that can be made by non-residents through Ukrainian bank accounts (previously limited to investments).
4. Foreign trade and investments
The most crucial changes in these sectors include:
- extending the deadline for Ukrainian residents to make settlements under their export-import operations from 180 days to 365 days;
- expanding the list of currencies, which companies can use to invest (as foreign investments) into Ukraine (now includes Russian ruble, Belarusian ruble, Indian rupee, Brazilian real etc.).
5. Simplified insignificant value FX transactions
Newly adopted legislation further simplifies the conduct of insignificant value transactions up to UAH 150,000 (approx. EUR 4,000) in the FX equivalent. Specifically, within the daily limit of UAH 150,000:
- both residents and non-residents will be able to purchase and transfer FX funds on the basis of an application and without additional documentation (unless expressly requested by the bank);
- individuals will be entitled to transfer FX funds abroad without opening an account with a bank; and
- individuals will be permitted to buy FX online.
Moreover, the new rules allow (with only some restrictions):
- residents to hedge their risks under cross-border loans through entering into FX forward transactions with Ukrainian banks; and
- residents and non-residents to enter into FX swap transactions with Ukrainian banks.
6. Verification of foreign currency transactions
Even though many restrictions for foreign currency transactions have been set aside, the new rules still require Ukrainian banks to additionally verify most foreign currency transactions exceeding UAH 150,000. This rule applies to all payments made abroad by Ukrainian residents exceeding this amount, except for payments made by the state or under state guarantees, payments to IFIs, payments made under an international technical assistance program, payments made under agreements between Ukraine and the EU, and payments made to a Forbes Global 2000 company, its subsidiary or an affiliate, etc.
Banks are required to carry out additional verification of any foreign currency transfer:
- under a cross-border loan agreement;
- by a Ukrainian surety under a suretyship agreement;
- for repatriation of dividends to a non-resident;
- for repatriation of funds to a non-resident received from the sale of corporate rights, securities;
- for regular conduct of related currency transactions, which are under the threshold of UAH 150,000.00; or
- in any other case deemed necessary by the bank.
The process of such verification includes, inter alia:
- examining information on the good standing of the parties to a transaction;
- checking if a transaction is in line with regular business activities of the parties; and
- identification of the ultimate beneficial owners of the parties.
With respect to cross-border loan agreements, banks will be required to verify that interest rates are adequate and aligned with the market. This means that even though the maximum interest rate cap has been repealed by the NBU, banks still might refuse to effect cross-border payments if the banks believe they are not in line with market standards, business activities of the parties or Ukrainian legislation.
The NBU has already instructed banks to recommend to clients that they notify banks about cross-border loans prior to payment dates to avoid any delays in payments. Bearing this in mind, parties include respective protection clauses in agreements to avoid breach of their obligations in case of delays due to additional verification procedures by banks.
7. Remaining restrictions
Despite the complex approach of the NBU to reduce regulatory pressure on the currency market, a number of restrictions will remain in effect at least for the present as per the road map presented by the NBU depending on Ukraine’s macroeconomic stability. These restrictions include the following:
- repatriation of dividends (to both foreign and Ukrainian accounts) is allowed only up to EUR 7,000,000 per calendar month for dividends distributed prior to 2017;
- repatriation of funds (to both foreign and Ukrainian accounts) by foreign investors from the sale of securities, corporate rights in Ukrainian companies, or reductions in a company’s share capital cannot exceed EUR 5,000,000 per calendar month;
- mandatory sale of foreign currency proceeds in amount of 50%; and
- foreign currency cannot be purchased with borrowed UAH funds.
Law of Ukraine “On Currency and Currency Transactions” No. 2473-VIII dated 21 June 2018
Resolution of the National Bank of Ukraine “On Approval of the Regulation on the Currency Market Structure of Ukraine, Terms and Procedure for Foreign Currency and Bank Metals Trade on the Currency Market of Ukraine” No. 1, dated 2 January 2019
Resolution of the National Bank of Ukraine “On Approval of the Regulation on Conduct of Transactions with Currency Assets” No. 2, dated 2 January 2019
Resolution of the National Bank of Ukraine “On Approval of the Regulation on Cross-Border Movement of Currency Assets” No. 3, dated 2 January 2019
Resolution of the National Bank of Ukraine “On Approval of the Regulation on the List of Protection Measures, Criteria for their Introduction, Prolongation and Early Termination” No. 4, dated 2 January 2019
Resolution of the National Bank of Ukraine “On Approval of the Regulation on Protection Measures and Determination of the Procedure for Conduct of Particular Foreign Currency Transactions” No. 5, dated 2 January 2019
Resolution of the National Bank of Ukraine “On Approval of the Regulation on the Procedure for the Provision of Information by Banks to the National Bank of Ukraine related to Contracts that Provide for the Fulfilment of Debt Obligations by Residents before Non-Resident Creditors under Borrowed Credits, Loans” No. 6, dated 2 January 2019
Resolution of the National Bank of Ukraine “On Approval of the Instruction on the Procedure for Currency Supervision by Banks over Deadlines to Make Settlements under Export-Import Transactions of Ukrainian Residents” No. 7, dated 2 January 2019
Resolution of the National Bank of Ukraine “On Approval of the Regulation on the Procedure for Analysis and Verification of Documents (Information) related to Currency Transactions by Authorised Institutions” No. 8, dated 2 January 2019