Ukraine: Capital Controls

CMS Cameron McKenna, 
Kyiv, Ukraine, Tue, March 31, 2015

On 3 March 2015, theNational Bank of Ukraine (the "NBU")issued Regulation No. 160 "On Regulating the Situation in the Monetary andForeign Currency Markets of Ukraine" ("Regulation No. 160"),which replaced NBU Regulation No. 758 dated 1 December 2014 ("Regulation No. 758").Regulation No. 160 will remain in effect until 3 June 2015. Regulation No. 160aims to ensure the stability of the Ukrainian national currency by limitingforeign currency cash outflow.

Regulation No. 160 extendsthe restrictions previously imposed by Regulation No. 758, but also creates thenew ones. In particular, the following restrictions from Regulation No. 758 areextended by Regulation No. 160:

(i)           the 90-day maximum term of payment underexport and import transactions;

(ii)          the requirement for the mandatory sale of 75%of foreign currency proceeds from abroad received by legal entities,representative offices and entrepreneurs; and

(iii)         the prohibition on early payment undercross-border loan agreements (subject to certain exceptions) by residents.

The prohibition of certainforeign currency transactions is broadened and extended. Regulation No. 160prohibits purchasing and transferring foreign currency under the followingtransactions:

(i)           repatriation of funds received by foreigninvestors as a result of sale of the securities issued by Ukrainian entities(with an exception for debt securities sold on the Ukrainian stock exchange)

(ii)          repatriation of funds received by foreigninvestors as a result of: (a) sale of corporate rights in Ukrainian entities(other than shares); (b) reduction of charter capital; or (c) exit of foreigninvestors from the companies;

(iii)         repatriation of dividends to be paid to foreigninvestors; and

(iv)        transactions authorised by individual NBUlicences, although this is subject to certain exceptions. In particular, suchprohibition will not apply to the transactions under (a) licenses issued tolegal entities for depositing foreign currency funds into bank accounts abroad;and (b) licenses issued to a guarantor (surety) for payment under a guarantee(suretyship) securing obligations under a loan granted by the internationalfinancial institution or export-import agency.

Regulation No. 160 imposesthe following new restrictions:

(i)           authorised banks are prohibited frompurchasing foreign currency per instructions of Ukrainian legal entitiesprovided that such entities have foreign currency funds on their current anddeposit accounts exceeding USD 10,000. This minimum does not include (a)pledged funds; (b) funds placed into the deposit accounts before the effectivedate of Regulation No. 160; and (c) funds deposited into accounts opened withbanks declared to be insolvent. The client shall submit to the bank theinformation on the total amount of funds deposited on all of the accountsopened by the client with authorised Ukrainian banks;

(ii)          authorised banks are prohibited from carryingout clients’ transactions if the NBU notifies the banks about its refusal toconfirm such transactions. If a foreign currency transaction exceeds USD50,000, the authorised bank shall submit to the NBU scanned copies of thedocuments serving as a basis for such transaction; and

(iii)         authorised banks are prohibited from carryingout their own derivative transactions on stock exchanges, provided that thebasic asset thereunder is foreign currency or its exchange rate.

The banks are stillsubject to the obligation to monitor foreign currency purchase transactions ona daily basis. The banks shall analyse such transactions and service only thosethat have an express legal basis. The banks shall also enhance controls over foreigncurrency purchase transactions on the basis of any new contracts beingsubmitted to the banks by their clients for the first time. The NBU is grantedthe right to suspend any transaction suspected by the NBU as illegal andrequest additional documents regarding such transaction.

The above requirementsevidence further toughening of the currency controls in Ukraine. This meansthat the likelihood of a bank's refusal to effect a payment which is notexpressly referred to in the relevant NBU regulations is now even higher, sincesuch payment might not be seen to have an express legal ground.

Legislation: Regulation ofthe National Bank of Ukraine "On Regulating the Situation in the Monetaryand Foreign Currency Markets of Ukraine" No. 160 dated 3 March 2015.

 Authors:

Daniel Bilak, Managing Partner, Daniel.Bilak@cms-cmck.com

Vitaliy Radchenko, Partner, Vitaliy.Radchenko@cms-cmck.com