On 5th of May, 2016 (effective from 11th of May, 2016), the National Bank of Ukraine (NBU) introduced a number of legislative changes for a partial relaxation of strict foreign currency controls that have been imposed during the most recent political and economic crisis of 2013-2016. Specifically, the following changes were introduced:
1. Funds which are transferred to Ukraine with the purpose of making foreign investments are not subject to conversion into local currency hryvnia (UAH).
This new change is a special exception to the temporary general restriction from the National Bank which states that 75% any foreign currency funds received in a business bank account from overseas is automatically converted into local currency hryvnia at the time of funds receipt in Ukraine.
After the amendments, foreign investments can be made in Ukraine without conversion to hryvna, including transferring money to share capital of Ukrainian companies (business investments), purchase of real-estate, shares etc.
As a result of the new change, the automatic conversion to UAH will not take places in the following cases:
- when the beneficiary of funds (seller, subsidiary of foreign investor) is a legal entity or private entrepreneur and the payment is made through investment account of foreign investor;
- when the beneficiary of funds is private individual and the payment is made directly from overseas account of the foreign investor to account of private individual.
2. The verification term for foreign currency purchases by authorized banks on behalf of their clients was reduced from 4 to 3 bank working days. Consequently the importers will have to wait three (not four as before) days after depositing the required hryvnia funds for making settlements with their foreign counter-parties.
3. The verification term for overseas transfers was reduced from 4 to 3 bank working days. As a result, payments overseas (both in hryvnia and foreign currency) can be made 3 bank working days after depositing of the respective amount with the bank.
4. Termination of the restriction to transfer hryvnia or purchase of foreign currency for settlements with foreign counter-party if settlement was made for goods where customs clearance was made before 1st of January, 2015 (earlier such payments could be made only for company’s own foreign currency)
5. Termination of the restriction to transfer hryvnia or purchase foreign currency for settlements with foreign counter-party if settlement is made under foreign economic agreements where there was change of creditor or debtor (earlier such payments could be made only for company’s own foreign currency).
Also, it’s worth noting that earlier this year, the NBU:
- increased the limit on cash withdrawals for the population (from UAH 20 000 to UAH 50 000 equivalent in foreign currency per day and from UAH 300 000 to UAH 500 000 in hryvnia per day);
- increased limits for purchase foreign currency in cash by private individuals from UAH 3 000 equivalent per day to equivalent of UAH 6,000 per day.
Additionally, the National Bank of Ukraine has announced about its plans to allow investors to repatriate their dividends; it has obligated Ukrainian banks to collect information about clients willing to repatriate dividends (with indication of amounts), and to provide this information to the NBU by May 20, 2016. At present under NBU regulation there is temporary ban on transfer of foreign currency for paying dividends to foreign investors.
Although these changes are encouraging, businesses and individuals in Ukraine are still stifled with numerous foreign currency control restrictions that have led to total mistrust and lack of confidence in the country’s banking and financial regulatory system. Some of the key restrictions are present include:
- 75% any foreign currency funds received in a business bank account from overseas are automatically converted into local currency hryvnia at the time of funds receipt in Ukraine (with some exceptions, including funds transferred to Ukraine with the purpose of foreign investments as described above);
- limitations for the purchase of foreign currency by private individuals and withdrawal of cash from bank accounts:
- cash withdrawal from bank accounts – up to the equivalent of UAH 50,000 in foreign currency and UAH 500,000 in national currency per day;
- purchase of foreign currency in cash – up to equivalent of UAH 6,000 per day (within one bank institution).
- a number of restrictions to repatriate foreign investments, including ban on purchase and transfer foreign currency overseas in order to:
- pay the dividends to non-residents;
- pay the selling price to a foreign investor for shares or participatory interest in Ukrainian companies (in case foreign investor sells shares/participatory interest in a Ukrainian company to a Ukrainian resident);
- pay to a non-resident as a result of decrease of charter capital of a Ukrainian company’s or withdrawal of a non-resident from a Ukrainian company;
- pay the selling price to a foreign investor for the securities issued by Ukrainian companies (except for the sale of debt securities by a non-resident at a stock exchange and sale of the state bonds);
- maximum 90-day term for return of foreign currency proceeds under export contracts after supply of goods/services overseas and the same maximum 90-day term for supply of goods/services after making advance payment overseas by residents under import contracts;
- ban on early repayment of loans from non-residents in foreign currency including payments under amendments to the loan agreements aimed at shortening the loan repayment period (with certain exceptions)
- ban for the banks to buy foreign currency for the clients (except for individuals) if the clients have their own funds in foreign currency at their accounts (exception is if the total amount of the client’s funds does not exceed equivalent of USD 25,000);
- advance payments under import contracts for amounts over USD 500,000 (or its equivalent) can be made only via letters of credit confirmed by the banks rated not lower than the investment class;
- purchase of foreign currency at the interbank currency market by the bank on behalf of its clients can be made not earlier than on the third bank working day;
- clients funds transfers overseas can be performed by the banks not earlier than on the third bank working day.
It is worth mentioning that NBU currency control restrictions often contradict with other Ukrainian laws and international treaties, protecting private property and foreign investments. There are number of court decisions, disputing application of some of the restriction for the specific cases.
Due to economic crisis in Ukraine and strict currency controls rules of the NBU, a significant number of foreign investments are shut off leading to a depressed local business environment. Individuals and existing businesses do not want to make further investments and many are actively exploring ways to relocate to other countries.
Under current financial environment in Ukraine, people do not trust their banks and prefer to keep money in cash and in a foreign currency such as USD. As an example, vast majority of real-estate property owners only want to transact in cash in USD. Similarly, whenever possible, employees prefer to receive payment in USD.
Since 2013 the NBU temporary restrictions have been normally implemented for period of 3-6 months with subsequent prolongation. The next upcoming review of restrictions by the National Bank will take place in June 2016.