In the course of this week, the National Bank of Ukraine (NBU) has been actively imposing and revoking restrictions and prohibitions on foreign currency transactions.

On 23 February 2014, the NBU adopted Resolution No. 124, which restricted advance import payments and prohibited purchase of foreign currency with borrowed funds. On 24 February 2015, the NBU adopted Resolution No. 130, which imposed a temporary (from 25 to 27 February) ban on the purchase of foreign currency by bank's clients. However, on the next day the ban was revoked by Resolution No.131 effective from 26 February 2015.

Please see below a summary of the new rules imposed by the NBU and certain preliminary recommendations to the importers.

Restrictions on advance payments under import contracts

Contracts, which fall under the restrictions

Restrictions imposed by the Resolution No. 124 apply starting from 24 February 2015 in respect of contracts satisfying the following criteria:

  • the contract provides for import of goods, works, services or intellectual property rights;
  • payments under the contract (in full or in part) are made in advance of the delivery; and
  • the total price of the contract exceeds USD 50,000 or USD 500,000 (depending on the thresholds, different restrictions apply).

When determining whether the threshold is exceeded, please note that:

  • in determining whether a threshold is exceeded, the total price of the contract (the aggregate amount of payments under the contract, not each installment separately) has to be taken into account;
  • for the purpose of the threshold test all payments (not only those made in advance) are have to be included into calculation (e.g., a contract with the total price of USD 60,000 will exceed the threshold of USD 50,000 even if only USD 20,000 is paid in advance);
  • if a contract does not specify its total price, threshold calculations will cover aggregate amount of payments made on or after 24 February 2015;
  • if a contract was executed before 24 February 2015, the threshold test will apply only to payments to be made on or after 24 February 2015 instead of the total contract price;
  • if payments are denominated in a currency other than US dollar, then the calculations should be made on the basis of UAH equivalents at the official NBU exchange rates effective as of the date of the execution of the contract.

Restrictions applied to the payments under the contract

In case the USD 50,000 is exceeded, any advance payment (excluding payments with the use of letters of credit) will be subject to the following restrictions:

  • the servicing bank may not make the transfer of an advance payment earlier than on the forth banking day after receipt of the client's payment instruction and submission of the information on the payment to the NBU;
  • the NBU has the right to prohibit transfer of an advance payment within the four-days period (the relevant Resolution does not provide for any criteria for the NBU's decision on prohibition);
  • in case of several payments to the same non-resident entity under one or several contracts, the payment processing period may further increase, because the servicing bank may only submit to the NBU information on one payment transaction between the same parties during one day.

The above restrictions do not apply to advance settlements with the use of letters of credit confirmed by a bank with the investment grade rating and qualifying certain other requirements set out in the relevant NBU resolution.

If the USD 500,000 threshold is exceeded than any advance settlements under the contract may only be carried out with the use of letters of credit confirmed by a bank with the investment grade rating and qualifying certain other requirements set out in the relevant NBU resolution.

Certain general recommendations to importers and foreign counterparties

In connection with the imposed restrictions, importers and their foreign counterparties should consider the following actions:

  1. Auditing the contracts, which potentially fall under restrictions and determining whether they qualify for the restrictions criteria (note the special rules for the threshold test set out above).
  2. If the applicable restriction may result in a failure to comply with payment obligations under the contract, the parties should analyze provisions on liability for such violation and potential grounds for discharge from liability (e.g. force majeure or hardship clause) as well as notification procedure.
  3. Consider contacting the counterparties with regard to the imposed restrictions and, if necessary, initiating negotiations to modify the payment terms (including, introducing letter of credit settlements).
  4. Ukrainian importers should review the payment schedules under their contracts in light of the restrictions, in particular restrictions on one advance payment transaction per day between the same parties, four days waiting period before the payment is transferred by the bank, potential additional four days waiting period in case of the need to purchase foreign currency for making the payment.

Restrictions on the purchase of foreign currency

In addition to the direct restrictions on advance import payments described above, the NBU has imposed certain specific restrictions on the purchase of foreign currency.

NBU's Resolution No. 130 imposed a temporary (from 25 February until 27 February) ban on the purchase of foreign currency by banks' clients. However, the bank was effective during 25 February only, as the NBU subsequently lifted the ban by Resolution No. 131 with effect from 26 February 2015.

Resolution No. 130 also increased the period of "freezing" UAH funds transferred by a bank's client for purchasing foreign currency from three to four days. This will yet again increase the time needed for foreign currency purchase transaction by Ukrainian importers.

With effect from 24 February 2015, the NBU prohibited the purchase of foreign currency with borrowed funds. While this restriction appears to be aimed at limiting speculative demand for foreign currency on the Ukrainian foreign exchange market, it is likely to affect regular commercial transactions. If an importer structured its operations through borrowing in UAH and purchasing foreign currency to make payments under its import contract and then repaying the UAH loan with goods sale proceeds in Ukraine, now it will not be able to use this structure. As a result, importers relying on such structures will now become subject to currency risk, unless they use alternative structures.

Earlier this week the Head of the NBU Ms. Valeriya Hontareva also warned that further administrative exchange control measures are possible. Therefore, foreign companies involved in business in Ukraine should keep monitoring the situation and address these risks when preparing contracts with Ukrainian counterparties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.