Ukraine: NBU imposes temporary capital controls


Along with other emerging markets, Ukraine experiences significant pressure on its currency, the hryvnia, although the loss of 10% of its value last week was also influenced by the country's dire macroeconomic situation.

On 6 February 2014 the National Bank of Ukraine (the “NBU”) issued Resolution No 49, which imposes various capital restrictions with respect to the purchase of foreign currency and non-cash payments by Ukrainian banks on behalf of their customers (the "Rules"). According to the NBU, these temporary measures aim to ensure the stability of the Ukrainian national currency, the hryvnia, to protect depositors' interests, and generally to ensure the sustainability of the banking system in Ukraine. We note that this is not the first time that the NBU has introduced such measures. Some of these restrictions were also applied by the NBU back in 2008 - 2009 in order to minimise the influence of the financial crisis on the Ukrainian banking market.

The Rules are believed by the NBU to ensure availability of foreign currency in the market and consequently timely settlements under cross-border contracts. However, instead the restrictions envisaged by the Rules may complicate day-to-day operation for Ukrainian businesses and create additional expenses due to prohibition to use daily proceeds for making necessary payments. In particular this relates to Ukrainian importers using short money for settlements with their foreign suppliers or having such settlements on a daily basis. Due to restrictions on timing for purchase of foreign currency, they may find themselves unable to fulfil their payment obligations toward non-resident counterparties on time, as well as bear additional expenses because of inability to monitor and choose favourable exchange rate.  

Under the Rules:

1. It is prohibited to buy foreign currency for the purpose of:

(i)  early prepayment of loans (financial aid) received from non-residents, including under any amendments to loan agreements. It is not yet clear which amendments will be caught by the Rules. However, it is likely that those amendments related to overcoming the restrictions imposed by the Rules will be affected (i.e. an earlier payment being amended to refer to as a scheduled one);

(ii)   making investments abroad; and

(iii)  covering part of insurance reserves by insurers.

The Rules however, do not prohibit making these payments and investments using owned (i.e.; not purchased) funds.

2. All cash payment instructions, in any currency, from a customer (either a legal entity or private entrepreneur), shall be performed by the banks only on the basis of the balance of a customer's account as of the beginning of a business day. Any funds that will be credited to the customer's account during that day will not be taken into account for these purposes. This limitation does not extend to any mandatory payments, such as payments to budgets, social funds, salaries and business trips.

3. Banks are not allowed to buy foreign currency on the interbank currency market on behalf of individuals (residents and non-residents) for more than UAH 50,000 per month for the purposes of transfers abroad. The limit does not apply to any payments or transfers:

- for study;

- for medical treatment abroad;

- for expenses in connection with a person's death abroad;

- under court judgements and decisions of courts, investigation and other law enforcement authorities;

- in case of re-locating abroad for permanent residence; or

- in case of transfer abroad by non-residents of their salary, pension, alimony received in Ukraine.

4. In order to buy foreign currency, legal entities and private entrepreneurs are required to credit the relevant amount in UAH to the bank's nominated internal (analytic) account. The bank will then buy foreign currency in 6 business days after this transfer by a customer. This means that customers will need to plan their foreign currency payments and order foreign currency well in advance.

The restrictions specified in items 2 and 4 above seem to be aimed at supporting the banks' payment capacities, as these provide some additional possibilities for banks to use customers’ funds, although only for a short period of time. This also enables the NBU to control the amounts of foreign currency required in the market and to make necessary interventions. 

The Regulation took effect as of 7 February 2014. Although the Rules are temporary, the Regulation does not set out any expiry date of its validity.