Currency environment improvement will come in February

In 2019, the long-awaited Law of Ukraine “On Currency and Currency Control” enters into force, which will be the beginning of currency reform in Ukraine. This means that as early as in February, significant improvements to the currency environment may occur for citizens, Ukrainian businesses, and foreign business operating in Ukraine or interacting with Ukrainian businesses. However, is this an unambiguous win for the country, as it seems at first glance?

Liberalization of cash flow

The law provides for a significant relaxation of legislative restrictions on the movement of funds, including those originating from Ukraine, in the case such a transfer is carried out by individuals.
Prior to the entry into force of the law, the placement of foreign currency funds on accounts and deposits outside Ukraine, as well as making investments using such funds, required an individual license from the National Bank of Ukraine, or NBU. Although on paper the procedure for obtaining such a license was not complicated, in practice, many citizens wishing to invest abroad soon realized with disappointment that in fact it was almost impossible to obtain such a license.
However, keep in mind that despite the legislative relaxation, one can be refused permission to transfer money abroad if the transaction does not pass financial monitoring checks.

Deadlines to settle export-import transactions

Deadlines to settle export-import transactions have been cancelled. Before the entry into force of the law, this term was 180 calendar days. However, everyone engaged in entrepreneurial activity (not only in Ukraine) understands that even with a thorough calculation and planning, there is always a probability of unforeseen events. It should be noted that the law still gives the NBU the right to impose restrictions on export and import payments, and currently, the National Bank has already established a period of 365 calendar days for this. However, this restriction does not apply to transactions of insignificant amounts (up to Hr 150,000 ($5,350)). It should be borne in mind that in case of a violation of the payment deadline, a person may be subject to a monetary penalty (0.3% of the transaction amount for each day of delay).

Registration of loan agreements with foreign banks

The compulsory registration of loan agreements granted by foreign banks to residents has been abolished. Before the entry into force of the law, such registrations required time, which is always lacking in a dynamic business environment. However, there are certain other issues here. The NBU has obtained the right to introduce restrictions related to the movement of capital in the event of the financial state of the banking system becoming unstable, a deterioration of Ukraine’s balance of payments, or a threat to the financial system’s stability. However, such restrictions are defined by the law as temporary.

Liability for violation of currency legislation

In a pleasant change, sanctions previously foreseen by the Law of Ukraine “On Foreign Economic Activity,” in the form of a temporary suspension of foreign economic activity and individual licensing, have been abolished. But this does not mean that such sanctions can be totally forgotten, as the new law grants the NBU the right to issue permits and restrictions with regard to individual foreign exchange transactions that potentially could mean the return of individual licenses. However, a certain tendency towards positive change has been established so far.

The law also provides for liability as a result of currency legislation violation, and it remains quite significant, thus requiring businesses to perform a careful analysis of each stage of a business transaction.

The liability of banks is largely foreseen by the Law of Ukraine “On Banks and Banking,” so they will not find anything fundamentally new for themselves. Greater caution should be taken by non-bank financial institutions and companies that are not financial institutions, however.

Thus, the law provides for the following types of liability for non-bank financial institutions: written warnings; restrictions, suspension or termination of the implementation of certain types of currency transactions; penalties of up to 20 percent of the equity capital amount; and suspension or revocation (cancellation) of a license for foreign exchange transactions. Liability of up to 100 percent of the transaction amount is foreseen for companies that are not financial institutions. The law does not define the liability amount, and it is not clear yet how exactly it will be determined depending on the type of violation committed, but we can assume that the level of the fines will gravitate toward the maximum allowable size.

We should also note that a number of old prohibitions remain valid for a certain period:

• currency supervision over liabilities’ netting has not been abolished;
• a ban on buying currency without incurring liabilities under foreign economic contracts or with borrowed funds;
• the commitment to sell 50% of receipts in foreign currency remains in force;
• restrictions on the repatriation of dividends abroad in foreign currency of 7 million euros per month and repatriation of investments of 5 million euros per month have not been canceled.

What conclusion can be made from the expected changes?

Despite what are at first glance liberal changes, the legislator leaves the NBU the right to unilaterally impose certain restrictions, including on the most anticipated aspects of currency reform. Taking into account the amount of responsibility and uncertainty in the gradation of its application, it becomes an urgent issue to constantly monitor the normative initiatives of the NBU.
It is crucial to not only understand the current state of currency legislation, but potential trends in its changes as well, since in a business environment, especially one that involves interaction with non-residents, or the activities of non-residents in Ukraine, it is important to develop a form and method of conducting foreign economic activity in advance, taking into account business needs.
In addition, in order to effectively make use of the full potential of foreign exchange liberalization, we should be aware of the planned abolition of the remaining temporary currency restrictions.

The article was published in Ukrainian periodical KyivPost