Easing of Currency Control Restrictions by NBU: Halfway There or a Long Road Ahead?

Since the early morning on the first day of the full-scale invasion of Ukraine that began in February 2022, the National Bank of Ukraine has  introduced urgent restrictive measures aimed at stabilizing the national economy and the currency market. In particular, the NBU adopted the now-well-known NBU Board Resolution On the Operation of the Banking System Under Martial Law, No. 18 (the Resolution No. 18) which imposed numerous (and temporary at the time) restrictions, which included, among other things:

  • establishment of a fixed FX rate for local currency to hard currency;
  • imposition of a ban on certain outbound transactions in hard currency with few exceptions meeting specific criteria set out by the NBU and/or the Cabinet of Ministers of Ukraine (CMU);
  • imposition of a ban on outbound repayment of loans and payment of dividends to non-residents;
  • establishment of a shortened deadline for settlements under export and import operations for the purpose of the timely return of the foreign currency proceeds by importers/exporters;
  • ban on the majority of expenditure transactions within the territory of Ukraine for resident legal entities which UBOs are residents of russian federation/republic of belarus (with a few exceptions, e.g. salary and tax payments);
  • establishment of restrictions on cross border movement of funds by individuals (with specific exceptions and thresholds).

Over the two years since adoption of Resolution No.18 the NBU has been instrumental in addressing various developments, new or evolved risks, as well as requests and concerns from the market by virtue of amending the restrictions that are in place. Overall, such restrictions made it possible to prevent panic and ensure the stable operation of the financial system and helped businesses and individuals to adjust to the issues that had arisen in the financial system. However, the fixed exchange rate regime and FX restrictions come with both benefits and costs and, over time, concerns have grown that the costs could outweigh the benefits.

At the same time, the NBU has targeted the key policy rate to tackle inflation and other related issues that the financial system had faced due to outbreak of the full-scale war by means of raising the key policy rate in 2022-2023 to 25% and gradually lowering it over the period of 2023-2024 to as low as 13.5% and this, except for certain exceptions and reservations, has to be seen as a positive trend.

In order to anticipate and properly address the growing costs and risks related to restrictions imposed under Regulation No.18, in July 2023 the NBU developed and presented in public a reform roadmap – Strategy for easing FX restrictions, transition to greater exchange rate flexibility and return to inflation targeting (Strategy). The purpose of the Strategy is to set out the priorities, principles and preconditions to guide the implementation of monetary and exchange rate policy measures in an orderly and consistent manner by minimizing risks to price and financial stability and maximizing the potential for sustainable economic recovery. In particular, the Strategy provides for three main parts, which generally describe the key considerations of the Strategy’s implementation in the following areas: (i) easing of FX restrictions, (ii) moving to greater exchange rate flexibility and, eventually (iii) a return to inflation targeting.

A few intermediary steps were taken by the NBU within the projected roadmap set out under the Strategy in late 2023 and early 2024, the most significant of which was cancelling the fixed FX rate and moving to a more flexible FX rate based on market indicators (with rigorous rules and massive NBU interventions on the currency market), but the biggest amendment to Resolution No.18 was introduced by the NBU in early May 2024.

Key changes to the restrictions previously set under the Resolution No.18 include:

  1. Cancelling currency restrictions on imports of works and services: restrictions on payments for the import of works, services; and intellectual property rights and other non-property rights intended for sale are cancelled provided that the delivery of goods/services under such transactions were made after 23 February 2021. Settlements under leasing/rental agreements are permitted without additional restrictions on the leasing/rental property and the date of the agreement.
  2. Giving permission for cross border repayment of “older” foreign currency loans: transfer of funds is now allowed for repayment under loans received from non-residents before 20 June 2023, which became overdue from 24 February 2022 according to the terms of the loan agreement, i.e., within the framework of a single loan agreement, resident debtors may transfer up to EUR1 million per quarter for repayment of accrued interest, which became overdue as of 1 May 2024. Moreover, this restriction will not apply to interest payments starting from 1 May 2024 and a future schedule for interest payments can be drawn up without restrictions.
  3. Easing of restrictions on cross border repayment of “newer” foreign currency loans: for “new” cross-border loans (i.e., received by residents after 20 June 2023), the minimum term of use of a “new” cross-border loan (after which purchasing foreign currency to repay such a loan is allowed), has been reduced from 3 years to 1 year. Moreover, the prohibition on purchasing foreign currency to repay such “new” cross-border loans now only applies to short-term loans with a term of up to one year, while purchase of foreign currency to repay interest on such “new” cross-border loans is now permitted regardless of the term of the loan.
  4. Permission to transfer dividends abroad: repatriating dividends accrued based on the results of activities for the period starting from 1 January 2024 is now permitted, however, monthly limit for repatriation of such dividends is capped at EUR1 million per month. In any case, this permission does not apply to transfer of dividends for previous periods.
  5. Permission for cross border foreign currency transfers by ROs of international card payment systems and foreign airlines: however, the cumulative maximum threshold between each representative office and its parent company is capped at EUR5 million per month.
  6. Permission for cross border foreign currency transfers for settling airport and port fees, fines, and membership fees.

The above changes to the restrictions under Resolution No.18 became effective by mid-May 2024 and the NBU is now in the process of analyzing the initial results of the implemented measures as well as handling any potential drawbacks.

As stipulated by the NBU, implementing any particular step of the Strategy will not be determined by timeframes, but will follow a rigorous assessment of meeting a set of pre-established macroeconomic preconditions on a sufficiently durable basis These criteria will ensure that adequate prerequisites are in place to support the successful implementation of steps under the Strategy, while safeguarding macroeconomic and financial stability amid a highly uncertain environment.

Based on the steps outlined in the Strategy and expectations of market participants, it is expected, except for any unexpected and/or negative developments that the NBU will, in the near future, move to the following matters within the auspices of easing existing restrictions:

  • permitting cross border transfer of interest on “old” loans;
  • permitting cross border transfer for other investment proceeds, including repatriation of investments;
  • liberalization of restrictions for transactions of individuals;
  • liberalization of restrictions for outbound transactions with derivatives;
  • eventually allowing for the possibility of lending to non-residents and investing abroad.

At the same time, in addition to the above steps, the NBU should also review and consider the following steps:

Firstly, to consider easing the existing ban on the majority of expenditure transactions within the territory of Ukraine for resident legal entities whose UBOs are residents of the russian federation/republic of belarus (with a few exceptions, e.g. salary and tax payments) by, for example,  distinguishing ones involved in aggressive activities against Ukraine (i.e., sanctioned, state-related, etc.) and those that do not pose any imminent threat to the state and wish to continue lawful business in Ukraine, as the latter may contribute to strengthening the economy, while currently such have been put in a still state and deprived of the means to conduct proper day-to-day activities in full.

Secondly, to implement an effective mechanism for the sale of balances of residents in the russian/belarusian ruble. In particular, Law of Ukraine No. 3498-IX On Amendments to Certain Laws of Ukraine Regarding the Improvement of the Functions of the State Regulation of Financial Services Markets of 22 November 2023 (Law No. 3498) has granted temporary (until 31 December 2024) permission to sell (exchange) bank customers’ cashless funds in russian/belarusian rubles, if the said transaction satisfies the following conditions:

  • non-resident banks (other than resident banks of the russian federation and the republic of belarus and banks subject to special economic sanctions and other restrictive measures prescribed by the Law of Ukraine On Sanctions), with which resident banks opened correspondent accounts in russian/belarusian rubles, unilaterally decide to convert (exchange) russian/belarusian rubles for other currencies;
  • russian/belarusian rubles can be sold (exchanged) at the request of a bank customer only once in respect of each currency type (russian rubles and belarusian rubles).

However, practical implementation of the above mechanism has stalemated, resulting in further increase in pressure over the existing balances of resident clients in russian/belarusian rubles – both on the liquidity of resident clients and liquidity of the respective banks holding such balances.

Thirdly, to analyze and consider potential ways to limit unreasonable and at times unlawful P2P transactions and habitually related to them cash and conversion transactions to effectively limit the growing pressure on the FX rate and inflation within the country.

The above suggestions are obviously not new and fall well within the scope of the Strategy and the NBU’s powers. The NBU has, for over two years now, been masterful in managing martial law issues on the financial market and precise in addressing any requests from market participants. Nevertheless, reiteration of previously identified areas may serve as yet another highlight and a call for action by the NBU at the right time. Further reasonable easing of martial law restrictions set out by Resolution No.18 as outlined by the NBU in the Strategy should ensure progressive improvement of the micro-economic and macro-economic outlook in Ukraine.

  • Oleksandr Rudenko

    Attorney at Law, Counsel, Ilyashev & Partners Law Firm

Ilyashev & Partners


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