New currency limitations of the NBU may block operation of business

Black currency market will find another reason to grow

Photo: Aleksey Solodunov

In a desperate attempt to keep the hryvnia rate from taking a nosedive, the NBU is trying to apply more administrative methods. Starting from today, the banks have been prohibited to sell to one individual hard currency in the amount exceeding UAH 3,000 per day (based on yesterday’s official rate that is around US $222 or EUR 173), according to the NBU’s resolution No. 591 of September 22, which introduced changes to two resolutions of the regulator. The limitation does not apply to cases, when an individual buys hard currency for repayment of a loan. At the same time, the NBU lowered a recently introduced barrier for individuals by cancelling the provision on the mandatory sale of hard currency by individuals if it is received as a money transfer from abroad.

Two ends of the rope

The regulator also prepared a number of surprises for legal entities. On the one hand, the central bank reduced the mandatory sale of currency earnings from 100% to 75%. “Liberalization of this norm is primarily aimed at creation of corresponding conditions for the activation of foreign economic activity,” reads the press release of the NBU. It seems that the 100% mandatory sale of export earnings in the end had a negative effect on the supply of hard currency on the market. In this situation, many major exporters are seeking ways to avoid transfer of currency earnings to the country. It seems that the NBU received signals about this,” says Chief of Strategic Planning at Ukrsotsbank (UniCredit Bank) Agshin Mirzazade.

On the other hand, the central bank introduced a number of limitations on settlements in hard currency. In particular, now it is prohibited to settle accounts on import transactions without bringing the goods to the territory of Ukraine. “For instance, a Ukrainian company can purchase raw materials abroad and use it for production abroad, without importing them into Ukraine,” explains Senior Attorney at Jurimex Law Firm Tetyana Prychepa. “Now such transactions will be blocked.”

Also, the NBU has set limitations on the return of officially made foreign investments in hard currency. The only exception will be sovereign bonds and shares circulating on stock exchanges. “In essence, an investor, who invested money into a Ukrainian company, cannot receive dividends as he cannot open an account in hryvnia abroad,” says Partner at Pavlenko & Poberezhnyuk Law Group Valeriya Tarasenko. Investors will also not be able to sell a number of companies, for instance registered as limited liability companies. “Now, if an investor wants to sell his corporate rights to an LLC, he will not be able to return his investment,” she says.

Starting from today, the NBU also introduced a prohibition on settlements in hard currency even on the basis of individual licenses of the central bank. “Based on this provision, prohibition on settlements in hard currency is applied to the following transactions: export, transfer or dispatch outside of Ukraine of currency valuables,” explains lawyer at S.T. Partners Petro Dubovskiy.

These limitations will scare investors away and lead to complications in settlements in the area of import operations. As a last resort, the companies will begin to structure deals differently, for instance, sell not Ukrainian legal entities, but offshore companies that own them. “These limitations go against the norms of the Civil Code and Commercial Code. Clients of financial institutions, whose rights will be limited in this way, will have no trouble obtaining a corresponding court ruling, obligating the bank to perform the transaction,” says Senior Partner at Kravets & Partners Law Firm Rostyslav Kravets. “By approving such limitations, the NBU is scaring foreign investors further away and undermining the trust in the Ukrainian banking system.”

It can be assumed that by introducing these limitations, the NBU expected to cut off the schemes of withdrawing funds abroad. “The sale of shares is a banal method of withdrawing currency. The NBU is right to an extent,” said a banker, who requested anonymity. The lawyers, however, are convinced that these limitations will not stop the majority of the schemes. “This is blocking of the settlements, not fighting against schemes. Nobody has yet prohibited to send currency under the pretence of any payment to non-residents,” says Prychepa. Meanwhile, this is the most popular scheme for withdrawing funds. A foreign company provides certain services to a Ukrainian company and charges payment for that. It is not easy to check whether the service was provided. That is why this scheme is so popular.

Black gold

Limitations on purchase of hard currency by individuals will also do no good for the market, experts assure. On the one hand, the demand of individuals for hard currency has been over-the-roof in recent months. According to the NBU, Ukrainians purchased US $201.3 mn more cash currency in August than sold it. Overall, in January-August, net purchase of hard currency by individuals amounted to US $1.74 bn, which is 6.6 times more than in the same period of last year. The limitation introduced by the regular will only artificially reduce the demand.

On the other hand, this demand will shift to the black market. “The limitations will put additional pressure on the people, which will result in panic and people circumventing the shadow market in an attempt to buy dollars,” says CEO of the Ukrainian International Currency Exchange Anatoliy Hulei. Noteworthy, NBU Governor Valeriya Hontareva recently said in the mass media that she was not going to fight the black market as that is the task of the law enforcement bodies.