Source: The Page
Currency control restrictions have been vital to maintaining Ukraine’s financial stability, though at the cost of impairing investment and increasing investor concerns. What financial measures can we expect to see in the near future, as Ukraine navigates a tricky path between prudence and reassurance? How soon will restrictions be relaxed? And what are the current domestic and international issues beyond martial law that one needs to be aware of when investing or doing business in Ukraine?
Balancing caution and with encouragement
Ukraine has officially been in a state of the full-scale war both physically and legally since 24 February 2022. As a consequence and in accordance with martial law, the National Bank of Ukraine (NBU) is obliged to regulate currency circulation (mainly governed by NBU Resolution No. 18 “On the Operation of the Banking System Under Martial Law”). The NBU must balance its role as a war-time currency regulator with the messaging of its newly updated strategy which includes a series of ambitious goals to ensure financial stability and support Ukraine in its path to victory.
The steps in this strategy could be seen as heralding a welcome and necessary change to current emergency regulations, with the inclusion of a stream devoted to exchange rate stability implying a gradual relaxation and eventual removal of currency control restrictions. However, while businesses are eager for currency control restrictions to eventually be relaxed, the NBU remains cautious regarding the timing for implementing these steps and has continued to stress that any relaxation is only feasible pending greater military and political stability. To allay investor anxieties and provide more clarity, the NBU is preparing a road map for potential currency control relaxation measures. However, the defined dates for officially adopting such measures have yet to be announced.
Currency control restrictions that businesses currently face include having limited access to different currency circulation instruments (including for investment return purposes) and limitations on conducting operational payments.
Permissible investment repatriation mechanisms
This year has seen the NBU make some progress in permitting repatriation instruments, in particular, lifting restrictions with regard to the repaying interest abroad on certain loan agreements:
- loans provided with the participation of an International Financial Institution (IFI), a foreign export credit agency, or a foreign government, and
- loans related to “new investments” in Ukraine (i.e. provided after 20 June 2023).
However, this progress is limited and there are still necessary restrictions in place. There are conditions concerning the amount of an investment, interest, and principal repayment terms that must be followed. Meanwhile, businesses which do not fall under these exemptions and therefore have no right to return “debt” investments may have to consider a debt-to-equity swap or reinvestment as alternative options.
Unfortunately, dividends as a core instrument cannot currently be repatriated abroad. However, investors can redirect earned profits into real estate, state bonds, or deposits in Ukraine, or reinvest in their own businesses.
Overall, expectations of fully relaxed dividend repatriation controls should be considered as being on the horizon but tempered by the understanding that prospective currency control adjustments will be taken later rather than sooner. The NBU is instead envisioning adopting dividend repatriation for “new” investments as a potential option (a similar approach with loans is also likely), with an eye to further reconstruction in Ukraine. As such, this approach implies efforts to stimulate new financial backing for further development, although once again the specific details and mechanisms are still under consideration.
Export and import operations
Having invested, businesses thinking about working with foreign suppliers need to keep in mind the currency control restrictions that apply to their operational activity in Ukraine.
One of the main issues arising from such operational activities is the matter of settlement deadlines in export and import operations. Over the last year, these deadlines have been shortened to 180 days (in comparison to 365 days prior to the full-scale invasion of Ukraine and the subsequent imposition of martial law).
This restriction continues to present challenges as businesses may sometimes need more time to import certain goods, due to either complications in production or logistical difficulties. However, it should also be noted that not all services’ export operations are subject to these settlement deadline requirements, with deadlines only applying to export insurance and transport services.
Companies affected by these measures may have to consider a number of different means for settling deadlines that may seem complicated or require expert guidance. These include applying for individual deadline extensions from the Ministry of Economy of Ukraine, force majeure certification issued by the Chamber of Commerce and Industry, or even court / arbitrage proceedings against counterparties in cases where agreements have been breached. However, with the right preparation of sufficient evidence and credible arguments, the necessary extension or certificates can be relatively easy to obtain.
In addition to settlement deadlines, there are concerns regarding what kind of payments are possible as there is a general prohibition on cross-border payments. The NBU previously implemented several relaxations, including payment options for all goods imported to Ukraine and expanding the list of works and services where payments to non-residents are permitted.
For works and services that are not directly allowed under the abovementioned existing framework, the NBU may issue individual approvals on a submission basis. However, such NBU approval to conduct foreign currency transactions for businesses outside of this scope is actually based on resolutions from the Cabinet of Ministers of Ukraine rather than the decision of the NBU itself.
It is the Cabinet of Ministers of Ukraine that defines whether a separate operation is within the scope of Ukrainian interests while the country is under a state of martial law. As a result, there is now a lack of clarity regarding this procedure related to the terms, objective criteria, and overall transparency. While individual approvals as an instrument could be used effectively to conduct separate transactions, this would require diligent reasoning and sufficient evidence on the part of the applicant.
Frontline banking and sanctions
Payments from frontline territories are another significant issue that could affect foreign currency transactions and are a relevant concern for both new investments and established businesses.
Ukrainian companies registered in frontline territories that remain under Ukrainian control often face complexities related to conducting foreign currency payments via foreign correspondent banks, as these banks presently deem frontline territories as being under occupation. Transactions in occupied territories are problematic for foreign banks due to the restrictions and punitive measures enacted by local and international sanctions regimes against doing business with Russia and Belarus.
As such, banks are hesitant to facilitate payments in any areas that could appear to fall foul of their respective countries’ legislation. However, the NBU is actively engaged in providing a list of Ukrainian-controlled frontline territories to foreign central banks which should help mitigate delays when conducting payments.
Preparation and optimism when looking ahead
For those currently running a business in Ukraine or planning to do so in the future, it appears that all NBU and governmental endeavours are concentrated on attracting foreign currency. In situations where repatriating investments from Ukraine is not on the agenda, the focus is now on new investments. Now more than ever, foreign investors should think carefully about potential structuring and modelling operations in Ukraine, including financial attractiveness, potential scope of work, location and servicing banks, further investment returns and opportunities for reinvestment, etc.
Once the macrofinancial situation in Ukraine sufficiently stabilises, we have no doubt that the NBU and the Cabinet of Ministers will be keen to lift restrictions and signal that Ukraine is fully open for business once more. In the meantime, those who have already invested in Ukraine may want to consider opportunities like reinvestment in existing projects, developing new business, or purchasing state bonds.
