On Dec. 4, the National Bank of Ukraine kept currency controls in place for another three months to prevent capital flight and to stabilize the hryvnia, Ukraine's national currency.
Bankers praised the move, saying that the hryvnia is too fragile to lift the administrative regulation.
Meanwhile, Ukrainian exporters who generate the foreign capital flow to Ukraine complain that the inflexible and sometimes unclear monetary policies lead to losses and encourage corruption.
Mandatory sale of currency; 90 days to settle transactions
The nation’s biggest airline, Ukrainian International Airlines, loses on exchange rate differences and commissions for commercial banks after 75 percent of its foreign currency earnings are automatically sold and then repurchased for payments to foreign contractors. The airline incurs many of its costs in foreign currency. Forced conversion makes it hard for them to pay for these expenses.
The company, in e-mailed comments to the Kyiv Post. said that the restrictions do not solve the problem of foreign currency deficits in Ukraine but reduce the competitiveness and artificially increases the cost of air travel.
Exporters complain that intermediary banks abuse the function assigned to them by the bank.
“The banks sold foreign currency at a lower rate than companies could sell it on its own at a normal auction format,” Viktor Valeyev, the director of the Ukrainian Association of Information Technologies, told the Kyiv Post.
“In fact, the NBU has introduced a tax on export and import operations,” Mykhailo Nepran, first vice president of Ukrainian Chamber of Commerce and Industry, voices concerns of exporters.
He said the rule hits the machine-building industry, which needs to buy hard currency to import spare parts and materials to finish orders of foreign clients. The machine builders also do not fit into the 90-day period set by the NBU for a conclusion of cross-border transactions.
Host of regulations
The monitoring of the interbank currency market by the NBU showed that the volatility of the Ukrainian hryvnia was partly caused by exporters who, after having their earnings converted into hryvnia, started buying hard currency again for advance payment contracts.
To avoid extra pressure on hryvnia exchange rate, the central bank banned importers and exporters from buying hard currency on the domestic market and obliged all legal bodies to turn for dollars and euros to foreign creditors.
According to Maksim Prazdnikov, Logitech country manager in Ukraine and parts of the former Soviet Union, international companies are now careful in their dealings with Ukraine as the overall forecast remains negative. They refuse to insure default risks in Ukraine and limit loans to the Ukrainian clients. Logitech’s head office in Switzerland reduced its credit lines to Ukraine so to allow distributors to provide a minimal presence of goods on the market.
The only solution for importers is a bank guarantee or bill of credit from international investment banks, which requires money and time. “Thus, the restrictions of the NBU lead to additional expenditure on running the business,” Prazdnikov told the Kyiv Post. “It is incorporated into the price of goods for the ultimate buyer who has already seen increases due to the import tax and tariff as well as hryvnia devaluation.”
In order to prevent capital flight from Ukraine the NBU has increased the list of operations which are subject to its verification. But in some cases, the criteria of those checks are not clarified.
In a press release, the Ukrainian Venture Capital and Private Equity Association points at a Sept. 3 National Bank ruling which restricts the following: (i) assignment of the loan agreement by the debtor or the creditor in the cross-border loan agreement; and (ii) change of the debtor or creditor of the cross-border loan agreement.
In practice, groups of companies often use loans from foreign shareholders to fund Ukrainian subsidiaries. During acquisitions, creditors usually assign the right of claim on such corporate loans to buyers of the Ukrainian companies as part of the agreement. With the regulation NBU closed a loophole for illegal capital flight, yet, at the same time it cut financing for Ukrainian outsourcing IT firms.
At the same time, the NBU says it can approve changes to the agreement within one group of companies but does not specify the procedure and criteria how the companies can receive the approval.
“If there is a legal framework, but there are no mechanisms how it can be administered, a margin for a bureaucratic judgment is growing,” Anton Prysyazhnyuk, managing partner of Magnusson law firm told Kyiv Post. “In this decision of the NBU, we do not see the clear rules and absence of those rules creates corruption.”
Choking investment until macroeconomic improvements
Business representatives believe that the capital controls prevent investment, nurture shadow sector and encourage companies to work with offshore intermediaries.
According to Dmytro Sologub, the NBU deputy head, the central bank understands the negative influence of capital controls on economic growth.
Yet everything rests on macroeconomic stability, which the currency controls help create.
“I talked with investors about withdrawing capital controls,” he said at a panel discussion of Ukrainian macroeconomic strategy. “But unfortunately, no one of them was ready to double the investment exposure to Ukraine if nothing changed in the country.”
Capital controls were imposed in August 2014 and strengthened in February to slow influence and stabilize the hrvynia, which has lost two-thirds of its value in two years.
The deputy head of the National Bank, Oleh Churiy, said that capital controls can be withdrawn in mid-2016 if the economic situation improves.
