Currency exchange controls have always held a specific place in the banking and finance law. Virtually no international financing transaction to Ukraine is made without it. This summer the National Bank of Ukraine canceled a part of the restrictions, imposed two years ago, and has permitted the payment, among other things, of dividends for 2014-2015. So we can talk about gradual liberalization and some simplification of the work of Ukrainian business, but one cannot yet expect radical changes in the state's monetary policies
Currency exchange control issues have become particularly pressing over the last two years, when the National Bank of Ukraine adopted temporary currency restrictions in the fall of 2014 in response to the difficult economic situation.
This is not to say that these temporary currency restrictions have somehow cardinally affected the well-established and approved schemes of structuring financing transactions. Rather, this is about the creditor, who is ready to provide financing to the Ukrainian borrower now, and should understand the associated legal risks. For example, such creditor should be ready for the fact that he won't be able to require early repayment of the loan (unless the loan is included in a narrow list of exceptions).
In addition, the National Bank of Ukraine is gradually canceling these temporary currency restrictions at the moment in the process of stabilizing the foreign exchange market. The opportunity (though in limited amounts) to repatriate dividends accrued to foreign investors in 2014 and 2015 might be the most significant easing of recent times. Moreover, the National Bank of Ukraine has reduced the requirement for the mandatory sale of currency earnings from 75% to 65%. The requirement on obtaining the cost examination certificate was completely excluded. Previously, such requirement was applied to the majority of payments, made abroad, for goods and services, if the sum of the payment exceeded the threshold of 50,000 EUR.
In accordance with this fact, one can talk about gradual liberalization of currency restrictions and some simplification of the work of Ukrainian business. At the same time, it is important to realize that the majority of temporary currency restrictions are still in force. Therefore, obviously, we should not expect big interest on the part of an investor in investing in Ukraine, when he is limited by legislation to repatriate his investments.
It should also be borne in mind that, except for temporary currency restrictions, there are still currency restrictions under the Decree of the Cabinet of Ministers of Ukraine "On System of Currency Regulation and Currency Control" (which are already outdated).
In addition, the registration requirement for loans from non-residents can cause practical difficulties. Unfortunately, the procedure of such registration is not flexible and provides a rather narrow and rigid list of conditions to be met by foreign credit. Furthermore, speaking from the perspective of foreign creditors, the loan registration requirement often seems unnecessarily elaborate and sometimes illogical. The creditor is, usually, more interested in observing the requirements of legislation, than the borrower. But after the loan has been granting, the creditor cannot exert special influence on further registration of amendments to the loan agreement, as the registration obligation rests solely with the borrower.
Moreover, there are still restrictions on maximum interest rates on loans from foreign creditors which, in fact, are a limitation of the cost of borrowing as they also include commission charges and other payments on the loan. Such maximum interest rates do not correspond to market conditions and the real cost of fund raising, taking into account current situation on global financial markets and the Ukrainian risks.
At the same time, it should be understood that currently very few transactions on provision of new financing to Ukraine are concluded on the market. Foreign commercial banks have not yet shown great interest in providing credit to Ukrainian business. The loan offers from these banks are limited, generally, by refinancing of old loans for approved clients (and there are too few of them). International capital markets are still closed for Ukrainian business. Actually, foreign financing to Ukraine is now provided only with the assistance of export credit agencies or from institutional donors (such as the European Bank for Reconstruction and Development, the International Bank for Reconstruction and Development, and the International Finance Corporation).
Restructuring and settlement of issues concerning existing debt are more pressing issues for Ukrainian borrowers and their creditors. A number of large Ukrainian companies either have restructured their debt during last year, or are still in the negotiation process with creditors. In such transactions, issues of currency exchange control can also be instrumental, even when this is not about changing the terms of financing. For example, foreign creditors can face difficulties when trying to sell (assign) troubled debt to third parties. The National Bank of Ukraine actually forbade such transactions in August of last year, having eliminated the possibility of registering replacement of the parties on the loans from a non-resident. The National Bank of Ukraine raised this prohibition in January this year, but significantly complicated the procedure for registering amendments to the loan agreement in the case of replacement of the parties. At the same time, an obligation to register is placed upon the borrower, who is not, as a rule, at all motivated to prepare a complex and large package of documents for the registration of amendments to the loan in the National Bank of Ukraine, especially in cases when default on the loan has already occurred.
Changes in legislation
There have been statements for a long time now about the need to liberalize currency exchange controls. Some experts have also come to the consensus that Ukrainian currency exchange control rules are too rigid and actually prevent the inflow of investments into the country. Moreover, specific proposals on reforming the legislation on currency exchange controls already exist. For example, the draft law providing an exception to the requirement on receipt of an individual license from the National Bank of Ukraine to make investments abroad in the amount of up to 50,000 EUR to the countries of the Organization for Economic Co-operation and Development is already before Parliament.
Furthermore, the Verkhovna Rada has registered the draft Law "On Currency Regulation and Currency Exchange Control" intended to replace the Decree "On Currency Regulation and Currency Control System" and the Law "On the Procedure for Making Payments in Foreign Currency". Currently, it is difficult to give an objective assessment of this draft law. On the one hand, it contains a number of provisions that may be regarded as "weakening" currency exchange controls. For example, it is an opportunity for residents to open accounts abroad without a license from the National Bank of Ukraine. On the other hand, the draft law contains a lot of provisions that, on the contrary, tighten and strengthen the existing regime and give the regulator more powers to exert monitoring and control in manual mode. In general, proceeding from the fact that the draft bill was registered in Parliament more than a year ago and has still not been put to the vote in Parliament; its prospects seem rather elusive.
In any case, in the adoption of such bills a key role is played not so much by legal aspects as political will and the general economic situation. Since the national economy is still volatile, and inflation risks remain high, it is difficult to expect the Government to take such a reckless step and radically change the existing currency exchange control policy.