In May, the NBU implemented the largest package of easing of currency restrictions since the beginning of the full-scale war, but for now it is not enough

The topic of currency liberalization was actively discussed at the roundtable «Problems of Exporters in Time of War: Regulatory Challenges» organized by GMK Center. The event was attended by representatives of exporting steel companies, experts, business associations and in-house lawyers. In particular, Ferrexpo, Centravis, Interpipe, ArcelorMittal Kryvyi Rih, the National Association of Mining and Processing Industries of Ukraine, the EBA and others joined the discussion.

Evolution of mitigations

With the start of the full-scale invasion, the NBU introduced strict currency restrictions to maintain financial stability in the country. The relevant resolution adopted on February 24, 2022, prohibited businesses from withdrawing currency from Ukraine, and this was the first time companies faced such obstacles. However, the regulator gradually began to ease them.

In particular, in July 2022, the government abolished the list of critical imports introduced at the outbreak of the great war. The NBU, in turn, allowed businesses to buy foreign currency and transfer funds for imports of goods, and extended the deadlines for settlements for export-import transactions. However, restrictions on foreign currency purchases and cross-border transfers for imports of services remained in place.

In June 2023, the NBU approved a strategy to ease currency restrictions, move to greater exchange rate flexibility, and return to inflation targeting. Its preparation was one of the structural benchmarks under the Extended Fund Facility program with the International Monetary Fund (IMF), and it has been fulfilled.

Finally, in May 2023, the regulator announced the largest package of currency liberalization steps for businesses since the beginning of the full-scale war.

It was aimed at improving the business environment and the entry of domestic businesses into new markets, as well as supporting economic recovery and facilitating new investments.

Most of the changes came into effect on May 4, and the possibility to repatriate “new” dividends – on May 13.

The NBU’s liberalization covered the following areas.

  • All currency restrictions on imports of works and services were lifted.
  • Businesses have been given the opportunity to repatriate abroad “new” dividends on corporate rights or shares accrued based on the results of operations for the period from January 1, 2024. This relaxation does not apply to dividends paid out of retained earnings for previous periods or reserve capital.
    The monthly limit for the repatriation of “new” dividends is set at €1 million in equivalent.
  • It is now possible to transfer funds abroad under leasing/rental agreements
  • Conditions for residents to purchase foreign currency for servicing and repaying “new” external loans, which are received in foreign currency from abroad after June 20, 2023, to borrowers’ accounts in Ukrainian banks, have been simplified. In particular, the minimum period of using a “new” loan, after which it is allowed to purchase foreign currency for its repayment, was reduced from three to one year. The NBU has also allowed businesses to purchase foreign currency to pay interest on “new” loans, regardless of the term of use.
  • The NBU has also provided an opportunity to repay interest on “old” external loans, which, according to the terms of the loan agreement, are due from February 24, 2022. For interest payments that are overdue (as of May 1, 2024), the Bank is allowed to transfer no more than €1 million in the equivalent per calendar quarter. However, this restriction will not apply to future scheduled interest payments.

To protect macro-financial stability, the regulator provided additional conditions for the following operations:

  • no overdue debt under the relevant loan agreement as of February 24, 2022;
  • prohibition to purchase and transfer funds at the expense of loans or credits received from residents;
  • no provision for early payment or restructuring of overdue payments.

In addition, the NBU has eased restrictions on the transfer of foreign currency from representative offices to their parent companies.

“Cost” and prerequisites

According to NBU Governor Andriy Pyshnyi in his column for the Ukrainian edition of Forbes, the total “cost” of currency liberalization this year, taking into account the steps taken and further potential steps, will require almost $5.5 billion in foreign exchange reserves. However, this cost is taken into account in the updated macroeconomic forecast, which envisages that international reserves will remain at $43-44 billion in 2024-2025.

«We have been carefully preparing for this step and have eased currency restrictions from a position of strength, when all the necessary preconditions were in place. Risks to the rhythm of international aid have decreased, inflation is low, international reserves are at record levels, and the situation on the foreign exchange market is under control,» Pyshnyi emphasized.

During a meeting with the American Chamber of Commerce in Ukraine and the European Business Association (EBA), Pyshnyi explained that the regulator had carefully chosen each of the steps, weighing the priorities voiced by business and the country’s capabilities.

As an example of one of the most frequent requests from the business community, Pyshnyi mentioned the lifting of restrictions on imports of services. According to the EBA’s February survey, 88% of respondents called these changes «very relevant». Repatriation of dividends was the second most frequently mentioned issue (71% of respondents).

Pyshnyi believes that the monthly limit for repatriation of “new” dividends of €1 billion in equivalent and the quarterly limit of €1 million for servicing overdue “old” debts are quite adequate.

«We understand that old debts are a challenge for businesses. However, the country’s foreign exchange resources are limited, so we cannot yet allow businesses to service and repay such loans without restrictions. This would generate a multibillion-dollar demand for foreign currency, which would undermine exchange rate stability and macrofinancial stability,» the NBU Governor said.

Business needs

Large Ukrainian companies have repeatedly pointed out that currency liberalization is one of the most important prerequisites for the development of export-oriented businesses. In particular, this was emphasized by Metinvest CEO Yuriy Ryzhenkov at the Forbes «Made in Ukraine» Exporters Summit in March. According to him, this will make it possible to improve the investment climate and continue investing in the country. «If we don’t implement some ways to return investments, we won’t be able to attract them to Ukraine,» he said.

The importance of currency liberalization for domestic business, which would allow companies to repatriate interest on “old” debt and raise new capital, was also emphasized during the Exporters Summit by Yevhen Osypov, CEO of Kernel Agro Holding. He also emphasized the need to resolve the issue of currency control during exports in the agricultural sector. This would help combat “gray” schemes that allow currency to be returned to the country.

At the same time, DTEK explained that without solving the problems of servicing international debts, Ukraine will not be able to receive foreign investment in generating facilities. This was stated by DTEK Energy CEO Ildar Saleev during a DiXi Group discussion in March. At that time, he put the problem of currency liberalization on the list of three main challenges for the next winter, along with strengthening the physical protection of energy facilities and the debt of the balancing market.

At an April conference organized by EP, Oleksandr Vodoviz, head of the office of Metinvest Group’s CEO, called currency restrictions one of the factors holding back Ukraine’s recovery.

According to him, the company is negotiating with international investors to raise funds for development and modernization projects. However, they always raise the issue of a mechanism for returning investments.

«We are offered to draw up a payment schedule, but we cannot legally return the invested funds, as we are prohibited from withdrawing currency abroad,» he said.

According to Vodoviz, as long as this restriction exists, it is too early to talk about building new enterprises or even major reconstruction of old ones.

A pressing issue

The issue of the ability to service obligations under foreign loans and Eurobonds remains extremely relevant for large Ukrainian businesses that are looking for ways to obtain certain exemptions.

In February 2024, the government asked the NBU to allow the sale of foreign currency to large Ukrainian companies and holdings and its subsequent transfer for settlements on Eurobonds and with Western creditors.

The list of companies petitioned by the Cabinet of Ministers included Vodafone, steel pipe and railway products manufacturer Interpipe, mining and metals group Metinvest, agricultural holding Kernel, and three DTEK holdings. In total, there were 15 such petitions for many systemic companies and exporters.

The annexes to the orders state that these decisions will help maintain investor confidence, allow companies, many of which are large exporters, to save foreign currency, and ensure their efficient and more stable operation in the future. It is also noted that companies have loans from Western banks or are issuers of Eurobonds.

The NBU had the final say, but the regulator was in no hurry to make a decision.

Despite the restrictions, businesses found ways to service their debts, but in some cases they ran out of options.

For example, according to the EP article, during the two years of the full-scale invasion, Metinvest used more than $500 million of its own working capital to service Eurobonds. This was primarily due to the working capital of the group’s parent and international trading company.

Since February 2022, Interpipe has been taking all possible measures to ensure stable financial operations and settlements with creditors. However, the company eventually exhausted internal reserves to service its loan obligations and is on the verge of default due to currency restrictions imposed by the National Bank (if it has sufficient own financial resources and its own currency).

In April 2024, the NBU updated the rules governing the procedure for granting individual permits for foreign exchange transactions upon receipt of requests from the Cabinet of Ministers. While previously the government’s requests were the key grounds for making a separate decision, starting from April 20, the regulator will also largely rely on its own analysis of the possible consequences of such steps. In particular, the NBU will take into account whether this is consistent with the goals of ensuring macroeconomic, financial, and external stability, as well as the Strategy for Mitigating Currency Restrictions.

New “old” obstacles

The Ukrainian business community welcomed the NBU’s steps toward currency liberalization, the EBA said in a statement. However, it is noted that its continuation is extremely important.

The expansion of the established limits and conditions for the payment of dividends and interest on “old” debts remains crucial for business. According to the European Business Association, a number of restrictions on their payment will not allow companies to use the instrument of servicing payments on Eurobonds.

Despite the introduction of a large package of easing measures by the NBU, the issue of the ability of large export-oriented domestic companies to service foreign loans has not been removed from the agenda.

«In fact, all Ukrainian companies that received loans in the pre-war period do not have such an opportunity now, and I am primarily referring to private businesses. If we look at the measures taken by the NBU to liberalize currency restrictions, we see a number of relaxations for state-owned enterprises that can service loans under certain conditions. One of the latest changes also concerned the ability to service “new” loans. But the issue is that Ukrainian companies received loans before the war, and they cannot take advantage of what the NBU offers,» said Natalia Sydoruk, GR Director of Interpipe, at GMK Center’s roundtable on regulatory challenges for exporters during the war.

She also noted that all this is happening against the backdrop of constant calls from high-ranking officials to invest in Ukraine.

«We have to realize that foreign investment in Ukraine, in my opinion, is not coming in large volumes now and will not come in large volumes in the coming years. Therefore, Ukrainian companies will be responsible for the Ukrainian economy. And if we do not support Ukrainian businesses that can bring this money into the country, it is difficult to predict what will happen in this situation,» emphasized Natalia Sydoruk.

Oleh Krykavsky, Director of Government Relations at ArcelorMittal Kryvyi Rih, said that there are issues of strict regulation during the martial law period, and it is obvious that no fundamental liberalization of currency legislation should be expected at this time. Nevertheless, given the situation, there have been some small improvements.

The inability to make payments carries risks of default for systemic companies in the domestic economy due to their inability to fulfill their debt obligations. As the EBA reminds us, this will negatively affect the reputation in the international financial market not only of individual companies but also of Ukraine as a whole.