On 4 July 2018, the President of Ukraine signed the Law of Ukraine “On Currency and Currency Transactions” (the “Currency Law”) adopted by the Ukrainian Parliament on 21 June 2018. The Currency Law was prepared under the guidance of the National Bank of Ukraine (“NBU”) and will definitely mark a key milestone in the development of the new Ukrainian currency market.
On 7 February 2019, when the Currency Law will start to apply all current legislative acts governing the circulation of currency in Ukraine will lose their effect, including the archaic 1993 Decree “On the System of the Currency Regulation and Currency Control” (“Currency Decree”). The philosophy of the Currency Decree is based on a general prohibition of any currency transaction unless it falls expressly under an exemption listed in the Currency Decree. If a currency transaction is not an exempted transaction the only way to implement it would be to obtain from the NBU an individual license provided, however, that the transaction is of a category of licensable transactions in accordance with the existing NBU regulations.
Unlike the Currency Decree which all these years brought nothing but a frustration to the Ukraine’s investors, the new Currency Law is largely based on the principle of free movement of capital.
Below are only some of the features of the new Currency Law:
1. Principles of Currency Regulation
According to the Currency Law, the realisation of the concept of “currency regulation” in Ukraine will be based on the following three principles:
- Freedom of transacting in foreign currency, which includes the right of residents and non-residents of Ukraine to enter into and perform under the agreements denominated in foreign currency, including the right to open bank accounts in Ukraine and abroad; make investments, acquire currency values and assets abroad as well as transfer currency values freely through the customs border of Ukraine. This principle also aims to ensure that any restrictions and the protective measures are introduced solely on the grounds and in accordance with the applicable law;
- Risk – orientation, transparency and effectiveness of the currency regulation, which is aiming to ensure (i) financial stability, (ii) that the restrictive measures of the NBU are relevant and commensurate with the existing threats, (iii) any restrictive measures of the NBU are temporary, (iv) that any market restrictions are introduced in Ukraine publicly and transparently, and (v) priority of less discriminatory measures over the more discriminatory as well as the priority of market instruments of currency regulation over the restrictive measures as such; and
- Independence and market approach in currency regulation, which includes (i) floating currency rates, and (ii) independence of the NBU in implementing its currency and monetary policy.
2. Freedom to Transact in Foreign Currency. Cross-Border Payments and Trade
Pursuant to the Currency law, the freedom to transact in foreign currency is achieved through the correct application of the principles of currency regulation. In particular, this means that currency transactions are performed without restrictions subject only to mandatory provisions of the laws of Ukraine governing (i) national security and AML, (ii) international treaties to which Ukraine is a party (and which are ratified by the Parliament of Ukraine), and (iii) the restrictive measures introduced by the NBU.
The Currency law expressly provides that residents and non-residents of Ukraine will have equal rights in transacting in foreign currency. Pursuant to Article 4 of the Currency Law:
- Residents of Ukraine (legal entities and individuals) will be able to open accounts abroad with foreign banks and other foreign financial institutions and conduct transactions in foreign currency using such accounts;
- Non-residents of Ukraine (legal entities and individuals) will be able to open accounts in Ukrainian banks and non-banking financial institutions and transact in foreign currency using such accounts. Previously non-residents of Ukraine were, with minor exceptions, able to open in Ukraine only the so-called investment accounts which could be used solely for inward foreign investments and divestitures. Non-resident banks were able to maintain largely only correspondent accounts with Ukrainian banks and use them in accordance with international practice subject to the relevant regulations of the NBU;
- Cross-border transfers in foreign currency as well as currency trades must be made only via Ukrainian banks and non-banking financial institutions.
Noteworthy, the Currency Law sets out a general framework for the management of currency circulation and the new procedures for the management of currency circulation and exchange are yet to be developed by the NBU. Accordingly, only upon adoption by the NBU of these and other implementing regulations it will become clear how the new currency liberalisation will start working in practice.
3. Restrictive Measures of the NBU
The Currency Law provides that the NBU may, if it determines that there exist “signs” of unstable financial condition of the banking system of Ukraine or if in the opinion of the NBU the payment balance of Ukraine has “deteriorated” or there exist “circumstances” that are threatening the stability of the banking system or the financial system of Ukraine, impose, inter alia, the restrictive measures (заходи захисту) such as:
- mandatory sale of proceeds in foreign currency;
- obligatory time frames for making settlements in foreign currency and delivery of goods / services under export-import transactions;
- special rules for conducting transactions involving the movement of capital;
- permits and limits for certain categories of transactions in foreign currency;
- stricter prudential standards;
- allocation of reserves (provisions) for transactions in foreign currency.
The foregoing list of restrictive measures is not exhaustive and the NBU would have broad discretion in determining whether any of above deteriorating events or circumstances has occurred given that the Currency Law provides no criteria for such determination.
The NBU is authorised to introduce any restrictive measure for an initial period of 6 months and subsequently prolong it for another period not exceeding 6 months. A decision of the NBU to re-introduce any restrictive measure within a time period shorter than 6 months (from the termination date of any previous and similar restrictive measure) or any prolongation thereof will require the Board of Directors of the NBU to obtain a confirmation thereof from the Council of the NBU. In seeking such confirmation from the NBU Council, the Board of Directors of the NBU must petition the Council therefor 30 calendar days prior to the termination date of any relevant restrictive measure and the NBU Council will be obliged to grant (or withhold such consent) within a period of 20 calendar days thereafter. Failure by the NBU Council to take a decision regarding the requested confirmation within the prescribed time period will enable the NBU to introduce relevant restrictive measure(s) without such confirmation.
Importantly, the NBU must devise a comprehensive report describing the effect of the restrictive measure(s) each time within a 3 months period commencing on the date of introduction, termination or prolongation of any restrictive measure(s) and submit it to the Banking Activities Committee of the Parliament of Ukraine. Such report is viewed as a public document and shall be published on the NBU’s official website and be available there for review for an unlimited period of time.
Finally, the effect of all restrictive measures of the NBU may not exceed an aggregate period of 18 months during any consecutive 24 months period.
Pursuant to the Currency Law, the NBU and other relevant Ukrainian state authorities must adopt all regulations implementing the provisions of the Currency Law until the 7th of January 2019.
For further information please contact Oleg Mazur, firstname.lastname@example.org