With the light hand of deputies, despite the NBU ban, officials decided to allow large businessmen to pay off billions of foreign debts. The consequences of such decisions were not appreciated by either international partners or the National Bank.
In the very first hours after the start of the great war, the National Bank introduced a number of extremely strict currency restrictions. The reason is clear - to preserve international reserves and financial stability in conditions of absolute uncertainty and panic among citizens and businesses.
Most currency restrictions remain in effect more than two years after the first Russian missiles struck Ukrainian cities. In particular, the ban on private businesses transferring currency abroad remains in force. Even if we are talking about paying off external debts. Even if these are debts of large companies.
However, large businesses are trying to obtain an exception from currency restrictions in order to service external loans and Eurobonds. And it looks like he's succeeding. In early February, the government adopted a number of decisions that allow the transfer abroad of almost $2 billion, bypassing currency restrictions, to service the debts of five large groups of companies: DTEK, Metinvest, Kernel, Interpipe and Vodafone.
Now the National Bank is obliged to implement the government’s decision. However, they are in no hurry with this.
What happened
At the end of November 2023, the Verkhovna Rada adopted a law limiting the maximum interest rate on microloans to 1% per day. Before this, on average, microfinance companies (MFOs) charged their borrowers 2.5% and sometimes 5% per day.
The National Bank, which regulates the MFO market, also actively advocated the adoption of this law. True, the text of the final parliamentary decision contained one unpleasant surprise for the NBU, which concerned not micro-, but macro-loans.
An amendment by People's Deputy Boris Prikhodko (Dovira group) gave the government the right to exempt individual companies from currency restrictions that the National Bank introduced during martial law.
To do this, the Cabinet of Ministers must approve a petition to the NBU, asking for permission to transfer currency abroad by a certain company. The Central Bank considers such a request and implements it. The regulator has no right to refuse the government.
Already at the beginning of February, a number of companies tested the new law in action. They convinced the Cabinet of Ministers to accept 15 requests to the NBU to transfer more than $1.8 billion.
The government’s appeal concerned enterprises of five large groups: DTEK and Metinvest of Rinat Akhmetov, Kernel of Andrey Verevsky, Interpipe of Victor Pinchuk and Vodafone of the Azerbaijani NEXOL Holding.
Previously, the Cabinet of Ministers had already applied to the National Bank with requests for permission to transfer currency. However, then we were talking about much smaller amounts that it was important to allow to be transferred abroad.
As reported by the ED at the NBU, in 2022-2023 they made 9 decisions granting permission to transfer funds abroad for a total amount equivalent to $67 million (1 decision in 2022 for $29 million and 8 decisions in 2023 for $38 million ).
This time, the government's request concerns an amount that is equivalent to about 5% of gold and foreign exchange reserves, which the regulator is obliged to fulfill in conditions when almost no vital external financing has been flowing into the economy for two months.
Why do companies need an exception from currency restrictions?
In recent years before the big war, Ukrainian companies actively entered international capital markets. Sometimes their credit ratings were even higher than those of their sovereign, that is, Ukraine, which, in principle, is outside the rules of rating agencies.
Unlike the Ukrainian one, in the European financial market it is much more profitable to borrow funds in foreign currency. It was especially cheap to do this on the eve of 2022, when the world continued to experience record low interest rates. Servicing these debts, as a rule, was also not a problem, because such borrowers are export-oriented and receive the majority of their proceeds in foreign currency.
However, on February 24, 2022, the National Bank adopted a resolution that prohibited businesses from withdrawing currency outside of Ukraine. In fact, this decision could lead to defaults of companies that raised funds abroad. However, they found ways to continue paying their debts.
“In the two years since the start of the full-scale invasion of Ukraine, Metinvest has used more than $500 million of its own working capital to service Eurobonds. This became possible primarily due to the working capital of the Group’s parent and international trading company,” explained the EP at Metinvest.
Partially helping to service foreign currency debts was the fact that large Ukrainian businesses did not return foreign currency earnings from exports to the country. In addition, the source’s interlocutor at the National Bank noted, some companies resorted to manipulation, carrying out fictitious imports in order to transfer currency abroad.
Be that as it may, it seems that the ability to pay on issued Eurobonds for some businesses is being exhausted. At least that's what they talk about publicly.
“Since February 2022, Interpipe has taken all possible measures for stable financial activities and settlements with creditors, but today it has exhausted internal reserves to service its loan obligations and is on the verge of default due to the presence of restrictions established by the NBU (if there are sufficient own financial resources and its own currency),” noted Interpipe, which is asking the NBU for permission to transfer more than half a billion dollars.
Explaining why they need exceptions from currency restrictions, large companies note that this will help avoid default, maintain the investment attractiveness of Ukraine and even attract new investments.
“Fulfilling financial obligations to foreign banks is something that Ukrainian business can and even should do in the context of military realities to maintain the economy and positive investment reputation of Ukraine,” Kernel notes.
While the solvency of large taxpayers who employ thousands of Ukrainians is at stake, not everyone supports allowing them to transfer currency abroad. In particular, the National Bank itself opposes such a decision.
Arguments against
The National Bank is actively moving towards currency liberalization. From time to time, they make changes to the already mentioned resolution, weakening certain currency restrictions. For example, allowing the population to buy non-cash currency or allowing them to service external obligations to international financial organizations.
At the same time, they oppose individual decisions that are made not for all market participants, but only for a certain circle of people.
“The National Bank remains a supporter of an integrated approach to easing restrictions, in accordance with the Strategy (easing currency restrictions - EP).
This is due to the fact that the country’s foreign exchange resources are limited, especially given the disruption in the rhythm of international financing. Providing individual permits to individual companies will require appropriate expenditure of the country’s limited resources,” the NBU explained.
Indeed, due to the decrease in the flow of international assistance to the Ukrainian budget, the volume of international reserves is gradually declining. And this has been going on continuously since August 2023.
A sufficient volume of reserves allows the National Bank to feel more confident and maintain a stable exchange rate of the hryvnia, which has been allowed to fluctuate in a controlled manner since October last year.
But some of the companies that asked the National Bank for an exception from currency restrictions note that they do not need to buy currency for transfers abroad. They already have this currency in their accounts in Ukrainian banks. Consequently, its transfer should not affect the volume of international reserves.
Another warning from the regulator concerns that providing separate permissions for the transfer of currency abroad distorts the competitive environment and demotivates businesses that have not received such permissions.
Thus, according to NBU estimates, in Ukraine more than 3 thousand enterprises are waiting for permission to repay and service external obligations. Not all of them have their own currency for paying creditors. And if they all try to use government petitions to pay off debts, then reserves may not be enough, which will negatively affect exchange rate stability.
In addition to the National Bank, international partners also opposed the provision of permits to large Ukrainian companies. Thus, the EP was able to find out the contents of the letter that the head of the IMF mission in Ukraine, Gavin Gray, had previously sent to government officials. In it, he “persistently demands” from the Cabinet of Ministers to withdraw the petition to the NBU in relation to five Ukrainian companies. The IMF also recommends changing legislation so that the practice of using government petitions to circumvent currency restrictions is not repeated.
In its appeal, the IMF makes the following arguments:
– Providing individual permits runs counter to the general strategy of currency easing, which was developed by the NBU and agreed upon by the IMF.
– Approval of large cross-border transfers by private businesses could weaken foreign exchange reserves, and their decline could undermine the stability of the foreign exchange market.
– Granting privileged permission to service external debts to a limited number of companies threatens negotiations on the restructuring of Ukraine’s public debt under Eurobonds.
The last point will not have a direct impact on the restructuring negotiations, but rather will affect them indirectly. “Theoretically, holders of state Eurobonds can say, they say, Ukraine issues currency for commercial repayments, then why does it refuse to pay on sovereign debts,” says financial analyst of the ICU group Mikhail Demkiv.
In other words, Ukraine’s creditors may receive an additional argument in negotiations on debt restructuring for $22.7 billion, which Ukraine needs to conduct before the summer of this year.
What will happen next?
Now five large business groups continue to await the decision of the National Bank on granting individual permits for currency transfers. And, although according to the law the NBU must provide them, the same law does not say exactly when this should happen.
“The NBU took into account the government’s proposals set out in the relevant petitions, and once again emphasizes that currency restrictions are not a market practice, they are a forced consequence of a full-scale war. It is the war that remains the key deterrent to the influx of investment into Ukraine, and not currency restrictions,” the regulator said.
Off the record, ED's interlocutors at the National Bank hint that the company, which the government has applied for, may receive permission to bypass currency restrictions when these restrictions are lifted and everyone can carry out such operations.
Until then, big businesses will have to figure out ways to service their debts without transferring currency out of Ukraine. After all, they had somehow managed to do this for the previous two years.
