Date of publication: 12 July 2024
Oleksandr Rudenko, Attorney at Law, Counsel
Source: ZN.ua
The National Bank of Ukraine fixed the UAH exchange rate at the beginning of the full-scale war and imposed various safeguard measures and administrative restrictions. By taking these decisions, the financial system was able to avoid panic and ensure stability. Moreover, they facilitated the adaptation of business and the population to wartime conditions. Despite the advantages of a fixed exchange rate regime with strict foreign exchange controls, the disadvantages and difficulties have increased over time. Taking this into account, the NBU approved on 29 June 2023 a strategy for easing foreign exchange controls, moving towards greater exchange rate flexibility and returning to inflation targeting (hereinafter referred to as the “Strategy”), which outlined key priorities, principles, and prerequisites for implementing monetary and exchange rate policy measures that would increase exchange rate flexibility and, finally, ease trading and capital restrictions.
NBU foreign exchange liberalization strategy
The strategy defines a roadmap for easing foreign exchange controls. It includes the following stages with the corresponding focus:
The first stage is the minimization of multiple exchange rates, the liberalization of trade operations and the promotion of new loans and investments;
The second stage is the liberalization of trade finance, the management of banks’ currency risks, the possibility of repatriating interest on “old” debt obligations and investments;
The third stage is the possibility of making loans and investments payments, the liberalization of transactions of the population and transactions with derivatives, the possibility of lending to non-residents and investing abroad.
NBU switched to a controlled exchange rate flexibility regime on 3 October 2023 based on the roadmap specified, where the official rate is determined based on the exchange rate for transactions on the interbank market, rather than by virtue of Directive as the Resolution No. 18.
A new surge of foreign exchange liberalization: service imports, dividends and loans
Within seven months, on 3 May 2024, the NBU introduced a new package of easing foreign exchange controls within the second stage defined by the Strategy, namely:
- all foreign exchange controls for the import of works and services have been lifted, in connection with which the Resolution of the Cabinet of Ministers of Ukraine dated 24 February 2022 No. 153 “On Certain Issues Regarding Ensuring the Implementation of Import” has become obsolete. In addition, the NBU separately allowed businesses to purchase foreign currency and transfer funds abroad for the payment of airport and port fees, fines, membership fees, as well as funds from representative offices of foreign airlines and international card payment systems to the account of a non-resident – a legal entity whose interests these representative offices protect in Ukraine;
- it is possible to transfer funds abroad under leasing/rent; from now on, business entities can transfer funds abroad for settlements under leasing/lease agreements without additional restrictions on the subject of leasing/rental and/or the date of entering into the agreement;
- businesses have been given the opportunity to repatriate “new” dividends – legal entities whose founders are non-residents will be able to repatriate dividends abroad on corporate rights or shares accrued based on the results of activities for the period starting from 1 January 2024. At the same time, this easing does not apply to the payment of dividends from retained earnings for previous periods or from reserve capital. At the same time, the NBU set a monthly limit for the repatriation of such “new” dividends at the level of EUR 1 million or its equivalent;
- restrictions on the repayment of “new” external loans, funds for which are received in foreign currency from abroad after 20 June 2023 to the accounts of resident borrowers have been eased. At the same time, the ban on the purchase of foreign currency to repay “new” loans will be applied exclusively to the repayment of short-term loans for up to a year. In addition, the NBU has established the possibility of purchasing foreign currency to pay interest on “new” loans, regardless of the term of use of such loans;
- it is possible to pay interest on some “old” loans, which, in accordance with the terms of the loan agreement, are subject to payment from 24 February 2022. Within the terms of one agreement, for interest payments overdue as of 1 May 2024, the right to transfer no more than EUR 1 million equivalent per calendar quarter has been granted, while such a limitation will not apply to future scheduled interest payments on such a loan.
The impact of easing foreign exchange controls on the economy
Such changes, according to the NBU, will minimize the likelihood of Ukrainian borrowers defaulting and provide more favorable conditions for restructuring of external loans, as well as improve the conditions for attracting new capital to Ukraine. At the same time, NBU representatives unequivocally state that the response to any unproductive capital outflow will be swift and harsh.
An additional safeguard measure is the step-by-step approach to the implementation of any changes to the existing currency exchange regulation system established in the Strategy: the implementation of each individual step of the Strategy will not be determined by time limits but will be based on the assessment of compliance with several predetermined macroeconomic criteria. Each subsequent step will be preceded by an assessment of interim measures to ease foreign exchange controls, and this step will be carried out based on assessments of its impact on the state of the foreign exchange market, international reserves, macroeconomic and financial stability, considering the minimization of the risk of re-introduction of the relevant currency restriction.
The easing of foreign exchange controls introduced in May 2024 was long-awaited by business, but not free of potential risks. It is obvious that the NBU and servicing banks are making the necessary efforts to monitor the integrity of the implementation of existing foreign exchange controls to correctly assess the effectiveness of the measures taken and complete the foreign exchange liberalization measures defined in the Strategy at the first and second stages of the roadmap.
Currency exchange and transfer limits: business concerns
It is also advisable to pay attention to certain points, partly identified in the Strategy and outlined by market representatives during current activities.
Firstly, since the Law of Ukraine “On Currency and Currency Transactions” establishes that the total duration of safeguard measures cannot exceed 18 months within 24 months from the date of the first introduction of the relevant safeguard measure, it is advisable to review certain safeguard and administrative measures introduced back in 2022 as the Resolution No. 18 (which has been in force for more than 18 months), taking into account their appropriateness and effectiveness in the context of the recently introduced currency relaxation and in accordance with the purpose of the Strategy.
Secondly, by the Law of Ukraine dated 22 November 2023 No. 3498-IX, servicing banks are temporarily allowed to carry out transactions for the sale (exchange) of Russian rubles and/or Belarusian rubles for clients in non-cash form until 31 December 2024, subject to compliance with specified conditions. However, such a mechanism is not effective. Banks cannot meet the established requirements and therefore are unable to fulfill customer requests for the exchange of relevant funds. Therefore, it is advisable to consider an alternative mechanism that would ensure the interests of both clients and servicing banks. This will enable Ukrainian enterprises to exchange the available money supply and use the relevant funds in their own business activities.
Thirdly, the National Bank of Ukraine recently announced the possibility of introducing limits for outgoing P2P transfers from individuals’ card accounts based on the amount and number of outgoing payments per month. Given the challenges that natural persons face in the realities of war, as well as the opportunities and advantages confirmed by the experience of P2P transfers in Ukraine, it is advisable to consider alternative models for limiting fraudulent actions in the field of such transfers. For example, to introduce enhanced requirements and risk criteria as part of the implementation of a risk-oriented approach by servicing banks when working with relevant payments and clients.
In conclusion, there are key aspects in the field of foreign exchange regulation in Ukraine that require attention and improvement. First, it is necessary to review the safeguard measures introduced in 2022, taking into account their relevance and effectiveness in the light of currency relaxations. It is also necessary to develop an effective mechanism for the exchange of Russian and Belarusian rubles, which would satisfy the interests of both clients and banks, facilitating the effective use of these funds in the economy of Ukraine. In addition, it is important to find a balance between ensuring the security of P2P transfers and keeping them accessible to citizens under martial law. Instead of strict limits, it is worth introducing enhanced requirements and risk criteria within the risk-oriented approach of banks. These measures are aimed at optimizing foreign exchange regulation, supporting economic activity and protecting the interests of financial market participants in difficult conditions.
