Ukraine: Cross-border financing transactions under new currency control regulations

With the effect from 7 February 2019, the Law of Ukraine “On Currency and Currency Operations” no. 2473-VІІІ, dated 21 June 2018 (the “Currency Law”), and regulations of the National Bank of Ukraine (the “NBU”), adopted to implement the Currency Law provisions, introduce a new currency control regime including new rules governing the financial arrangements of Ukrainian borrowers with foreign lenders.

The following are the key developments in the new exchange control regulations:

Cross-border financing notification

Beginning from 7 February 2019, registration of cross-border financing by the NBU is replaced with submission by the banks of notifications on loan agreements through their recording with the automated information system maintained by the NBU “Loan Agreements with Non-Residents” (the “Automated System”). The notification requirements and procedure are set forth by the regulation of the NBU no.6 dated 2 January 2019 (the “Notification Regulation”). The notification requirement applies to the financing attracted by Ukrainian residents other than banks. Among other exemptions are the loans provided by international financial institutions, loans received or guaranteed by the state of Ukraine, and supplier credit arrangements.

Under the new procedure, a Ukrainian resident willing to receive an offshore financing should apply to its bank (i.e. the account bank) and inform the bank of its intention to use the account in this bank as a settlement account under the loan agreement with a non-resident lender and provide the bank with financing related information and documents. Once the bank receives all required information, it has five business days for filing a notification with the Automated System. Under the Notification Regulation, the bank (i) must be informed and supplied with the documents, and (ii) send a notification to the NBU before any transfer under the financing arrangement at hand. Not later than one business day after entering the information into the Automated System, the bank must inform its client and provide an excerpt from the Automated System confirming the same.

Unlike the abolished rules of the NBU regulating cross-border loan registration, the Notification Regulation does not specify the documents/information which should be submitted to the bank. Instead, it lists the information to be indicated in the notification which inter alia includes the financing terms and reference to the underlying financing documents as well as any other documents related to the project implementation and currency transactions thereunder. Hence, similar to the previously existing registration of cross-border loans, the new notification procedure requires Ukrainian borrowers to work closely with the bank well in advance of the planned disbursement to clarify the package of documents and other requirements of the bank.

New checks instead of maximum threshold

From 7 February 2019, the maximum threshold on payments to foreign lenders by Ukrainian borrowers no longer applies. Such payments, though, are now subject to additional check by the account bank based on the regulation of the NBU no.8 dated 2 January 2019 (which replaces the regulation of the NBU no.369 dated 15 August 2016) having introduced a new indicator for the additional verification by the bank – “inconsistency between the cost of external funding under certain loan agreements and market conditions”.

In the letter no.P/25-0006/2831 dated 17 January 2019, the NBU makes recommendations to the assessment of the cost of financing pointing out that the banks should consider the following two components: (i) a base rate, determining the value of financing in the relevant currency at the international/local markets (such as LIBOR or discount rate of the central bank of the relevant country), and (ii) additional margin reflecting Ukraine’s sovereign risks and individual risks of a particular borrower.

The NBU also mentions that if, apart from the indicator of the cost inconsistency, the bank also finds out that any other participant of the currency transaction under the financing project at hand is a party related to the client, the bank is required to conduct a thorough analysis of such transaction. In the NBU’s view, the concurrent occurrence of these two factors may indicate that the financing and settlements are not related to the real commercial activities of the client.

This is another issue which the Ukrainian borrower should clear with its bank before the implementation of the financing project. As a starting point, one can use illustrative examples given by the NBU in the letter to understand the regulator’s approach in the assessment of the financing cost.

More flexibility and fewer restrictions 

The new currency control rules provide for a number of positive and long-awaited relaxations, such as lifting the prohibition on early repayment of cross-border borrowings, possibility to attract financing from non-Ukrainian lenders in national currency, accumulation of FX funds at a Ukrainian borrower’s account for the purpose of debt repayment under cross-border lending.