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Prospects of Capital Control Liberalization in Ukraine

Prospects of Capital Control Liberalization in Ukraine

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Currency regulations in Ukraine have always been among the most significant impediments to foreign investments and access of Ukrainian businesses to foreign markets. In 2014, substantial external imbalances, capital flight risks, and panic in the foreign exchange market prompted the National Bank of Ukraine (NBU) to adopt tight capital controls, a number of which remain in effect. Notwithstanding the alleged soundness of such temporary measures, both foreign investors and Ukrainian businesses have long called for clearer and more predictable currency regulations, as well as safeguards to protect their interests. In July 2018, Ukraine finally adopted the long-awaited “On Currency and Currency Transactions” law (the “Currency Law”) which is intended to replace the archaic currency control legislation. The effectiveness of the new legal framework, however, can only be assessed once the NBU lays out detailed rules in its regulations.

General Framework

The existing currency regulations prohibit currency transactions unless they fall under an express exemption or an appropriate NBU licence is obtained. In particular, cross-border currency transfers, outward investments, and foreign currency payments (“FX Payments”) in the territory of Ukraine generally require individual NBU licences. The Currency Law, however, will generally allow free currency transactions. Among other things, the Currency Law will enable: (1) Ukrainian residents (both individuals and legal entities) to open foreign bank accounts and enter into transactions using such accounts, acquire foreign currency abroad, and make cross-border transfers of such foreign currency, in each case subject to reservations under the Currency Law and other laws; and (2) non-residents to open accounts with Ukrainian banks and use such accounts for cross-border and local currency transactions subject to reservations under the Currency Law and other laws. In addition, the Currency Law will allow both Ukrainian residents and non-residents to conduct certain transactions in foreign currency on the territory of Ukraine.

The Currency Law remains silent regarding outward investments. The definition of currency transactions will no longer apply to securities transactions. Therefore, the soon-to-be-adopted NBU regulations should not apply to outward investments, as is currently the case. However, outward investments by Ukrainian residents will still be governed by NBU regulations relating to cross-border payments.

Under the Currency Law, cross-border FX Payments will need to be carried out via banks, non-banking financial institutions, or post offices holding appropriate NBU licences (the “Authorized Institutions”), obtained according to the procedure set by the NBU. Both Ukrainian residents and non-residents will need to provide the Authorized Institutions with information about currency transactions carried out via those Institutions.

Restrictive Measures

The general freedom of currency transactions introduced by the Currency Law can only be limited by (i) temporary protective measures of the NBU (the “Restrictive Measures”), (ii) national security or anti-money laundering laws of Ukraine, and (iii) applicable international treaties.

The Restrictive Measures, among other things, may include: (i) a mandatory sale of foreign currency proceeds; (ii) time limits for settlements under export and import transactions; (iii) special requirements for capital movement; and (iv) special approvals or restrictions for certain currency transactions, etc.

In contrast to the existing regulatory environment, the Currency Law envisages a number of safeguards in connection with the Restrictive Measures, including: (i) grounds for introducing the Restrictive Measures (namely, unstable financial condition of the banking system, deterioration of the balance of payments, and threats to the stability of the banking or financial system); (ii) a maximum 6-month time limit for the introduction or extension of the Restrictive Measures subject to the overall 24-month time limit; (iii) NBU Council approval for the extension and re-introduction of the Restrictive Measures; and (iv) reporting by the NBU to the Financial Policy and Banking Committee of the Parliament, with the report published on the NBU website.

The NBU will need to adopt new currency regulations providing for the Restrictive Measures if grounds under the Currency Law exist no later than 30 days before the Currency Law becomes operational. These Restrictive Measures will not be subject to the safeguards under the Currency Law and will remain effective until the NBU cancels them.

Under the Currency Law, the procedure for introducing the Restrictive Measures – including the criteria for introducing the Restrictive Measures – must be set by the NBU. Such approach vests the NBU with substantial discretion, as the grounds for introducing the Restrictive Measures under the Currency Law are very broad.

Overall, the Currency Law is one of the major milestones in opening the Ukrainian economy to foreign investors and providing access to foreign markets for Ukrainian businesses. The call is now for the NBU to use this opportunity wisely.

By Glib Bondar, Senior Partner, Avellum

This Article was originally published in Issue 5.8 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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