Recent Developments in Ukrainian Currency Regulation
Taras V. Dmukhovskyy
Introduction
By its Resolution No.544 On Amendments to Legislative Acts on Trading in Foreign Currency (Resolution No.544) which was adopted on 14 December 2010 and came into effect on 28 December 2010, the National Bank of Ukraine (NBU) has further reshaped the rules of operation of the Ukrainian inter-bank currency market.
In addition, by its Resolution No.569 On Amendments to Resolution No.614 of the Board of the National Bank of Ukraine of 22 December 2010 (Resolution No.569), the NBU has also lifted certain restrictions in respect of the registration of amendments to foreign currency loan agreements between foreign lenders and Ukrainian borrowers.
These developments evidence that the NBU has taken initial steps towards liberalization of the Ukrainian currency control environment.
Legal framework
Decree of the Cabinet of Ministers of Ukraine No.15-93 On Currency Regulation and Control of 19 February 1993 (the Currency Control Decree) remains the principal legislative act establishing the Ukrainian currency control legal framework. Under the Currency Control Decree, trading in foreign currency on the territory of Ukraine may be carried out only by or through Ukrainian commercial banks and other financial institutions holding an appropriate license of the NBU and only at the Ukrainian inter-bank currency market.
The detailed foreign currency trading rules are set out by Resolution No.281 of the NBU Regulation on the Procedure and Conditions for Foreign Currency Trading of 10 August 2005 (the FX Rules). The FX Rules, inter alia, provide a list of exclusive grounds for the purchase of foreign currency in the Ukrainian inter-bank currency market.
Resolution No.544 introduced two major amendments to the FX Rules, which are discussed below in more detail.
Holders of individual licenses of the NBU may purchase foreign currency
One of the important changes to the earlier existing currency control regime made by Resolution No.544 is that holders of individual licenses of the NBU are now expressly allowed to purchase foreign currency for purposes of currency operations (i.e., to make cross-border foreign currency payments for which the individual license was obtained) which are subject to licensing requirement and are permitted by the terms of such individual licenses. Prior to that change, such purchase of foreign currency was prohibited and, as a consequence, Ukrainian residents had to perform such currency operations using their own foreign currency funds (i.e., neither received as a loan nor purchased for the local currency (Hryvnia) in the Ukrainian interbank currency market).
However, Resolution No.544 still provides for certain limitations. For example, an individual holder of an NBU license cannot purchase foreign currency if the relevant NBU regulation, pursuant to which such individual license was issued, prohibits such purchase. For instance, Resolution No.483 and Resolution No.35 of the National Bank of Ukraine explicitly prohibit purchasing foreign currency on the Ukrainian interbank currency market in order to carry out currency operations authorized by the individual license issued under these Resolutions.
The above discussed change of the currency control rules is apparently a positive development which provides more comfort and certainty to the foreign businesses as to the ability of their Ukrainian counterparties to meet their obligations in the context of cross-border transaction and may foster an increase in foreign investment coming into Ukraine.
FX swap transactions
Another development is that Ukrainian commercial banks are now allowed to enter into foreign currency swap transactions (the FX swap) with the NBU. The FX swap involves a foreign exchange agreement whereby two counterparties exchange a set amount of one currency for the amount of equal value in another currency on a specific date at an agreed rate (spot FX transaction) and conduct a reverse exchange of the same currencies on a future date at a rate agreed (forward FX transaction) at the conclusion of the contract.
The earlier existing FX Rules did not provide for the possibility of such FX swap transactions. Notwithstanding the limited value of such development, since it mainly serves as a tool of the NBU in conducting currency interventions and cannot be used by Ukrainian banks in dealings between themselves, it can still be viewed as the positive sign since it further broadens the list of FX hedging instruments which may become available to other market players in the future as well.
Under the FX Rules, Ukrainian banks are allowed only to trade in forwards (deliverable, with a maturity of up to one year) among the broad range of possible FX derivatives. Unlike in more developed jurisdictions, it is still impossible to effectively hedge against foreign currency exchange risks in Ukraine with sophisticated FX derivatives such as options, swaps, etc. due to the absence of any such FX hedging instruments under applicable Ukrainian legislation.
No maximum interest rate requirement
No maximum interest rate requirement is currently applicable in respect of amendments to loan agreements with foreign lenders. Prior to 22 December 2010, the NBU had the right to refuse registration of an amendment to a loan agreement between foreign lenders and a Ukrainian borrower if the aggregate payments (other than the repayment of principal) under such loan agreement taking into account such amendment exceeded the amount determined by applying the then effective maximum permitted rate of interest. Following the abolishment of such rule by Resolution No.569, the NBU registration of amendments to the loan agreements is no longer subject to the above specified maximum interest rate restriction.
Conclusion
Although the above-mentioned developments demonstrate the first signs of a positive trend towards liberalization of Ukrainian currency control rules, generally, the Ukrainian currency control environment is still very restrictive and requires further substantial overhaul.
