Lifting currency restrictions will ease way for Ukrainian exporters
Ukraine’s exports reached $43 billion in 2017. But a country of 42 million people could do a lot better.
Ukrainian entrepreneurs aiming for foreign markets have suffered currency restrictions for quite some time. But that might change, as the long-awaited easing should go into effect on Feb. 7.
Previously, Ukraine’s currency regulations on exports were made under a 25-year-old decree of the Cabinet of Ministers, and relied on a bureaucratic administrative system for regulating foreign exchange operations. Almost every operation required multiple licenses, most of which are completely obsolete today.
“The new law will promote more concrete, more understandable and at the same time more business-oriented legislation from the National Bank of Ukraine,” said Oleksandr Rudenko, a senior lawyer at KPMG Law Ukraine.
For example, before if a contract were broken for one day and currency wasn’t received in time, then all foreign economic activity was prohibited for the company, member of parliament Mykhailo Dovbenko said on June 21, before the new law was adopted.
But now, after the law was signed by President Petro Poroshenko on July 4, the number of restrictions for exporters might be lifted early next year, experts predict.
After the economic crisis hit Ukraine in 2014–2015 as a result of the state budget being robbed of billions of dollars by then-President Viktor Yanukovych and his cronies, as well s Russia’s war against Ukraine, the country’s exports hit a major low.
In 2014 exports decreased by 14 percent comparing to previous year reaching $54 billion. In 2015 it plummeted even more — by another 30 percent and reached $38 billion, according to Ukraine’s state statistics agency.
But since 2016, exports started to gradually grow. Even though the country still hasn’t reached its historic peak in 2012 of $69 billion in exports, the progress is obvious — Ukraine is on the right track again.
For the first four months of this year exports amounted to $15.5 billion, or 13 percent more than for the same period in 2017, according to Cabinet of Ministers of Ukraine.
However, exporters still have to deal with the old currency regulation system before the law will finally come into force, and while they are anticipating the positive changes, they still have to deal with the old rules for a couple more months.
Currently businesses are obliged to sell 50 percent of their foreign currency earned from sales on the Ukrainian interbank foreign exchange market, according to Mykola Larin, project manager of ZED, an association of exporters and importers.
“With this new law such currency restriction must be completely removed,” Larin said.
Another serious restriction that exporters are dealing with has to do with time limitation for export-import operation payments, which is highly controlled by commercial banks and tax authorities.
Payments should be received within 180 days from the date of customs clearance. With the new law the deadline will be extended up to 365 days.
For the past four years, it was one of the most burdensome restrictions, according to Rudenko.
“This currency restriction created problems for those importers and exporters who, for objective reasons… could not pay on time,” he said.
According to Maria Repko, deputy director of Centre for Economic Strategy, a Kyiv-based think tank, there will be no such painful cases when a large transnational counterparty simply does not return funds on time due to the features of its business, and the Ukrainian company automatically falls under sanctions.
But that’s not all the changes the new law brings to exporters.
After the law will enter into force, the control for export-import operations less than Hr 150,000, or $5,300, will be abolished. Previously, all foreign exchange transactions fell under the control of the NBU and tax authorities, regardless of the amount of contracts.
A significant number of contracts made by small businesses usually do not exceed 5,000–6,000 euros, according to Larin.
“It is unknown yet how strict banks and the State Fiscal Service of Ukraine will be to the collection of documents,” Repko said.
One person who feels the pains of the current currency regulations in practice is Vladymyr Golodynets, general director of Kolonist winery.
His winery produces about 240,000 bottles annually, and about one percent of which are exported to Poland and England.
“When we buy a cork stopper for wine in Portugal, barrels in France, or bottles in Moldova, then we face currency restrictions that prevent us from buying products on time,” said Golodynets.
According to Golodynets, for such contracts it is necessary to give information about the final beneficiary, but sometimes such information is simply not available, like state companies in Moldova, where the winery buying bottles.
In addition to the changes already listed, businesses no longer will need to have individual licenses for investing abroad.
“It can be carefully assumed that it will make it easier for companies to invest abroad, like opening sales offices or service centers,” Repko said.
Pending NBU decisions
Despite all of the improvements in the upcoming currency regulations, the NBU will still have the main oversight in currency regulations and control, according to Larin.
By the end of the year, the central bank will finalize regulatory acts and make them public.
Only after that business will understand how the new law will work, whether there will be real improvements, or if it is made simply for a tick for the European Union, which requires changing the currency legislation, according to Ievgeniia Lytvynova, CEO of Club of Exporters of Ukraine.
“The anticorruption law has also been adopted, but everything works as before, so we must wait until the law on the currency will work on the facts,” said Litvinova.
But already now it is known that the NBU still will be strongly empowered to implement protection measures in currency regulation for exporters if the economic situation worsens or any crises appears.
It can easily set deadlines for payments for exports and imports, limits on foreign exchange transactions, or reserve funds for foreign exchange transactions.
“Everything can quickly change for exporters each time the NBU will “turn on” or “turn off” a button called Control,” said Larin.
Before the basic normative acts will be officially presented for currency regulations, it’s very hard to predict how it will make life easier for exporters, or if it will only be a cosmetic change, according to Repko.
“Members of parliament change three times a year — they toughen measures, then they make them easier. That’s why everything will depend on our regulator,” Golodynets said.
A man walks by freight containers at a Odesa customs unit on Aug. 29, 2016. Ukraine’s currency regulations on exports were made under a 25-year-old decree of the Cabinet of Ministers limiting exporters’ business. But that might soon change under a new currency restrictions law that should go into effect on Feb. 7. (Volodymyr Petrov)