Banking & Finance 2021

Last Updated October 05, 2021

Ukraine

Law and Practice

Authors



Arzinger is a top-tier Ukrainian law firm, considered to be amongst the market leaders for the last 19 years. In Arzinger, there are 11 partners and 120 legal professionals. Arzinger has offices in Kyiv, Lviv and Odessa, which allows the firm to combine tailor-made advice with regional market expertise, as well as having a German desk. The firm is highly ranked within the industry. Arzinger's banking and finance team advises clients on all issues connected with financial services, including general bank lending (syndicated and bilateral), trade finance, project finance (infrastructure and industrial projects), equipment finance, capital markets, regulatory issues and debt restructuring (refinancing and restructuring of existing loans). The firm concentrates its activity mostly on complicated cross-border deals, which require extensive knowledge of local legislation and its practical implementation, as well as broad international experience.

Since February 2014, Ukraine has experienced significant challenges in political, security and economic areas due to political crisis and the outbreak of conflict in the eastern part of the country. However, the Ukrainian government, together with the National Bank of Ukraine (NBU), managed to stabilise the inflation rate in the country and fluctuations of the national currency of Ukraine – the Ukrainian hryvnia. This has resulted in more confidence among local lenders to provide loans to the population and local businesses.

Moreover, the Ukrainian government introduced several support programmes for households and businesses. For instance, the Ukrainian government, in co-operation with local banks, offers mortgage-backed loans for families who wish to buy a house with lowered interest rates, or small- and medium-sized enterprises can apply for state support programmes whereunder banks provide loans for implementation of investment projects.

In addition, huge changes have happened in the financial regulatory framework. The National Bank of Ukraine has become the main supervisor and regulator in the financial sector. On 1 July 2020, the National Commission for Regulation of Financial Services Markets of Ukraine was liquidated. The power to supervise and regulate non-banking financial institutions (insurance companies, credit unions, pawn shops, etc) was transferred to the NBU. Currently, the NBU is removing from the non-banking sector those institutions that do not comply with legislative requirements. This will entail a purge of the financial sector and a decrease in the number of non-banking financial institutions.

The COVID-19 pandemic has resulted, among other things, in putting on hold or cancelling some large financing deals. The pandemic's impact was largely noticeable in international financing, where both lenders and borrowers were waiting for clarification of the situation. However, some international financial institutions have subsequently started to provide loans to Ukrainian companies for supporting their business amid the crisis.

In terms of consumer financing, local banks showed greater interest in developing and improving their online banking services via internet banking and mobile applications. These actions were triggered by an increase in the number of online users, since most branches were closed during the first months of the pandemic.

Finally, many banks introduced credit holidays to consumer borrowers and small businesses who had been deprived of any income due to the pandemic. The Parliament of Ukraine, upon the NBU's proposal, prohibited any increase in interest rates for the first two months of quarantine.

In Ukraine, the high-yield market is undeveloped and has a low impact on the overall financial market. Only large private and state-owned companies may afford to issue bonds. Currently, there is no basis to expect any significant developments in the high-yield market.

The loan market has not seen a growth in alternative credit-providers. Foreign/local banks and international financial institutions are still the main providers of funds to Ukrainian companies.

Cross-border financing transactions continue to be governed by foreign law, including by English law. Such transactions are dominated by commercial banks and export-credit agencies. The biggest foreign lenders in Ukraine are still international financial institutions (the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC), the Nordic Environment Finance Corporation (NEFCO), etc).

Within the last few years, there have been the following significant developments in Ukrainian banking and finance regulation that impacted the loan market.

  • In January 2018, the Ukrainian Parliament adopted a new currency-control legislation that has positively affected both lenders and borrowers. Under new legislation, many restrictions have been cancelled or mitigated, the registration of foreign loan agreements was substituted by a simple notification of the NBU via a local servicing bank, existing thresholds were increased, etc. The NBU continues to ease the remaining restrictions and thresholds from time to time, moving Ukraine to a free movement of capital system.
  • In July 2020, the NBU became the supervisor and the regulator of both banking and non-banking financial institutions. The NBU showed itself to be a great regulating government body that understands the needs of the market and aims to implement EU standards in Ukraine. Consequently, it is expected that in the near future, legislation regarding non-banking financial institutions will be substantially updated and the market will be cleansed of unsustainable and untransparent market members.

There are no pending reforms that are likely to impact the local loan market.

Environmental, social and corporate governance (ESG), or sustainability-linked lending, is a new phenomenon in the Ukrainian lending market that has only just begun to develop. At the time of writing, there are few local financial institutions that offer green loans aimed for increasing efficiency of the usage of natural resources or the leasing of various types of energy-efficient equipment and machinery. All such projects are supported by international financial institutions. At the government level, in April 2021, the NBU and the IFC signed the co-operation agreement for the implementation of a sustainable finance development project in Ukraine. Among other terms, the NBU shall draft the strategy and standards for sustainable and green finance in Ukraine. Therefore, green financing is in its initial stage of development.

Foreign banks and non-banking financial institutions may provide financing to Ukrainian borrowers without obtaining any licence or authorisation from Ukrainian government bodies.

There are no specific restrictions for foreign lenders for granting loans to Ukrainian companies.

At the same time, interest rates under such loans must not exceed average market rates. Otherwise, a local servicing bank which performs currency-control functions may deny payment of interest which is higher than the average on the market.         

Ukrainian legislation has no restrictions or impediments for granting a security to foreign lenders.

The Law of Ukraine "On Currency and Currency Transactions", dated 21 June 2018, and seven regulations of the National Bank of Ukraine compose a foreign currency-exchange legislation.

Control

Under foreign-exchange legislation, the borrower is obliged to notify the NBU about a concluded loan agreement with a foreign entity via its local servicing bank. Within five business days, the local servicing bank reviews the application and includes information about the loan agreement in the NBU’s Automated Informational System "Loan Agreements with Non-residents". As proof of notification, the local servicing bank provides the borrower with a respective letter and an extract from the informational system.

Repayment

Ukrainian foreign currency-exchange regulation obliges a borrower to provide a local bank with certain documents in order to repay a loan/interest or to reimburse a foreign security-provider, specifically:

  • documented proof of the borrower’s obligations under a loan agreement, ie, the original or a copy of the loan agreement;
  • in the case of reimbursement to a non-resident guarantor, documented proof of the non-resident guarantor’s fulfilment of the borrower’s obligations under the loan agreement.

Amount Transfer Limitation

In general, legal entities established in Ukraine are forbidden to transfer funds in an amount of more than EUR2 million per year abroad. However, transactions regarding repayment of loans, performance of obligations under security agreements and reimbursement of non-resident guarantors are excluded from any amount transfer limitations.

Currently, there are no general statutory limitations for the use of proceeds from loans or debt securities under Ukrainian law.

At the same time, legislation in the banking sector establishes a ban on the use of borrowed funds for the acquisition of shares in local banks and an increase in the registered capital of local banks. 

Neither a concept of an agent nor a trust is recognised by Ukrainian law. Moreover, these concepts are not recognised or tested by case law. Consequently, they are quite doubtful from a judicial-protection perspective.

However, Ukrainian legislation recognises the concept of joint and several creditors. This concept is the best option in terms of judicial protection. But, due to transaction peculiarities, it is not always possible to use a joint and several creditors' concept. Consequently, the lenders are forced to use a parallel debt concept for the appointment of a security agent, despite uncertainties.

Foreign Law Loan

In the case that a loan agreement is governed by a foreign law, it is usually transferred by way of an assignment or novation governed by that foreign law.

Ukrainian Law Loan

If a loan agreement is governed by Ukrainian law, it shall be transferred by way of executing a separate assignment agreement. The form of that assignment agreement shall correspond to the form of the underlying loan agreement, ie, if the loan agreement is executed in simple written form, the assignment agreement must be also executed in that form, etc. The parties may agree a valuable consideration for that assignment or a free-of-charge basis. 

The approval of the borrower is not needed, unless otherwise stipulated in the loan agreement. Nevertheless, the borrower must be notified about the assignment. Otherwise, the repayment of a loan by the unnotified borrower to the old creditor will be deemed a proper performance of its obligations.

Ukrainian Security Package

The transfer of a Ukrainian security package must be rendered through the execution of an assignment agreement. This assignment can be stipulated either in a loan-assignment agreement or in a separate security-assignment agreement, except for mortgage assignment agreements, which are always subject to separate agreement and notarisation.

Notification procedures are the same as previously mentioned. It is also usual practice to amend security agreements to reflect a new creditor's details within them. These amendments can make the enforcement process easier for the creditor in the future.

It is also worth noting that any assignment of pledges and mortgages must be reflected in the State Register of Encumbrances over Movable Property or in the State Register of Proprietary Rights to Immovable Property, respectively.

Under Ukrainian law, debt buy-back by the borrower is not prohibited. However, most of the local banks are restricted by their internal procedures from accepting a buy-back from the borrower. At the same time, it is quite a common practice when sponsors buy non-performing loans from lenders with some discount (sometimes very significant).     

There are no "certain funds" concepts under Ukrainian law.

Payment of interest to foreign lenders is subject to withholding tax. Standard withholding tax rate is 15%.

However, Ukraine has more than 60 signed double-taxation treaties with other states. Such treaties usually set a tax rate lower than 15%. Usually, it amounts to 10%.

Except for withholding tax, there are no other taxes, duties or tax considerations that are relevant for a foreign lender making a loan to a Ukrainian company. Nevertheless, a foreign lender should be aware of fees that will be charged in the case of the following.

  • The execution and registration of a mortgage agreement. Notaries charge notarial fees for the notarisation of an executed mortgage agreement and following the registration of a mortgage and the respective encumbrance with the State Register of Proprietary Rights to Immovable Property. In practice, the amount of a notarial fee depends on the value of the immovable collateral and varies from EUR200 to several thousand euros. In the case of high value, notarial fees can be negotiated with the notary;
  • The registration of an encumbrance over movable collateral. Notarial fees for registering the encumbrance amount approximately to EUR30;
  • Court and enforcement fees in the case of enforcement of agreements. Court fees for filing a claim regarding enforcement of agreements amounts to 1.5% of a claim amount; however, in no case shall it be more than UAH832,500 (approximately EUR26,300). The enforcement fee equates to 10% of the actually recovered amount received as a result of the enforcement.

Ukrainian law does not set any limitation on the maximum interest rate or the maximum interest amount that can be charged by a lender. However, according to the Regulation of the National Bank of Ukraine No 8, dated 2 January 2019, if an interest rate under the cross-border loan agreement does not correspond to market interest rates, there is a risk that the local servicing bank will scrutinise the transaction and request additional documentation/information.

A loan agreement (both local and cross-border) can be secured by various types of assets. In general, these assets can be classified into immovable and movable property and shall be covered by an agreement governed by Ukrainian law.

Immovable Property

Immovable assets (land, building, plant (if registered as immovable property)) can be used as collateral by way of the conclusion of a mortgage agreement. Parties are obliged to execute the mortgage agreement in front of a notary with further registration of a mortgage and encumbrance with the State Register of Proprietary Rights over Immovable Property.

The mortgagor can also provide as security an immovable asset, title to which will be obtained in the future, subject to proper documentary proof.

A notary has five business days in which to register the respective mortgage and encumbrance with the State Register of Proprietary Rights to Immovable Property. However, in practice, a notary renders all formalities and provides a lender with the necessary extracts within the same day or as a maximum on the next business day.

Notaries always require the mortgagee’s statutory and some other official documents for execution of the mortgage agreement. These documents must be notarised and apostilled or legalised according to local laws in the event that the mortgagee's state of registration is not party to the Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents, dated 5 October 1961.

See 4.2 Other Taxes, Duties, Charges or Tax Considerations for information about costs and expenses.

Movable Property

Moveable property (equipment, inventory, shares of a Ukrainian company, receivables, machinery, property rights) can be used for securing a loan transaction via the execution of a pledge agreement. Notarisation of a pledge agreement is not mandatory, unless parties have agreed directly otherwise in the agreement.

The pledgee has a right to register an encumbrance under the pledge agreement with the State Register of Encumbrances over Movable Property. This registration must be done via a local notary and is highly recommended, since it gives first-priority ranking over the movable collateral vis-à-vis third parties.

The notary is obliged to register the encumbrance within one business day from the moment of filing of the pledgee's application, although usually it takes only up to few hours.

Depending on the type of movable property, the following peculiarities must be considered:

  • in relation to a pledge of receivables, the pledgor’s debtor must be specified in a pledge agreement and notified about that agreement;
  • in relation to a pledge of future obligations, any such future obligations must arise based on the agreement, effective as of the moment of execution of the pledge agreement.

See 4.2 Other Taxes, Duties, Charges or Tax Considerations for information about costs and expenses.

Ukrainian law does not recognise a concept of a floating charge over assets of a company established in Ukraine. In practice, to reach a concept that is similar to a floating charge effect, parties usually conclude different types of pledge/mortgage agreements, such as:

  • a pledge agreement over receivables;
  • a pledge agreement of property rights to bank accounts;
  • a pledge agreement over movable property;
  • a pledge agreement of goods in circulation; and
  • a mortgage agreement.

Under Ukrainian law, only banks and other financial institutions can issue guarantees. Other companies can provide suretyships for the purpose of securing obligations. It is worth emphasising that such suretyships must be provided on a free-of-charge basis. Suretyships with remuneration provision can also be provided, but only by financial institutions.

Nevertheless, there are no restrictions on the provision of downstream, upstream and cross-stream suretyships/guarantees. However, it is of the highest importance that all corporate approvals of surety/guarantor that are signed by an authorised representative are received. The original of the approval must also be received by the lender.

There are no restrictions for a target company to grant guarantees or financial assistance in Ukraine, except for banks.

Banks are restricted from granting financing for acquisitions of their shares.

There are no other significant restrictions or costs associated with the granting of security or a guarantee.

Since sureties and securities have an accessory nature and are dependent on an underlying agreement, they terminate when the obligation under that underlying agreement is discharged. However, in order to cancel the registration of the mortgage and encumbrances thereunder or under the pledge agreement, the lender has to provide a notary with the respective release letter.

Priority of security is established upon the registration of an encumbrance over movable property or a mortgage with the respective register. Therefore, the timing of registration of security is decisive in determining the priority.

Encumbrancers can change the order of priority of an encumbrance over movable property upon mutual agreement, subject to the absence of any damages to all other encumbrancers as a result of that change of priority. The form of such an agreement is not specified in the law and can be incorporated in the letter or in the respective agreement. Moreover, such agreements survive the insolvency of a borrower. Priority of mortgages cannot be changed.

Collateral under the security agreement can be enforced through either a court procedure or an out-of-court procedure. The enforcement process will depend on the type of collateral being enforced.

In order to enforce immovable property, a mortgagee shall send a 30-day written notice regarding the breach of the secured obligations to the mortgagor and the borrower (if different from the mortgagor). That notice shall have information about the breach of the secured obligations and a request to cure the breach within a 30-day term. If the obligations remain uncured upon expiry, the mortgagee can proceed with any of following options.

  • Acquire ownership over the immovable property.
  • Sell the collateral to a third party. The mortgagor is obliged to notify the mortgagor and other mortgagees about any such intention within a 30-day term.
  • Obtain a writ from a notary.

Nevertheless, out-of-court procedures rarely prove effective, since the mortgagor does not co-operate with the mortgagee, challenges the enforcement in a court and Ukrainian notarial practice regarding enforcement via a writ is poorly developed.

Instead, the mortgagee may choose to go ahead with the court-enforcement proceedings. For the court enforcement, there are no requirements to send a prior 30-day written notice or to conduct any preliminary actions or negotiations. 

In order to enforce movable property, a pledgee shall send a 30-day written notice regarding the breach of the secured obligations to the pledgor and the borrower (if different from the pledgor). This notice shall have information about the breach of the secured obligations, information on the secured obligations, the type of enforcement to be used by the pledgee and a request to cure the breach within a 30-day term. Simultaneously, information about the enforcement shall be registered with the State Register of Encumbrances over Movable Property. If the obligations remain uncured after the term, the pledgee can proceed with any of the options described as follows:

  • acquire ownership over the collateral;
  • obtain assignment of claims or receivables from the pledgor;
  • transfer to the pledgee the respective cash amount (if funds on the bank accounts are pledged); and
  • obtain a writ from a notary.

In the same way as for immovable property, successful out-of-court enforcement is subject to the co-operation of the pledgor. Alternatively, the pledgee can opt for a court-enforcement procedure. There are no requirements to send a prior 30-day written notice or to conduct any preliminary actions or negotiations. 

The choice of a foreign law as the governing law of the agreement will be recognised as a valid choice by the Ukrainian court. However, Ukrainian legislation specifies circumstances when Ukrainian law must be used:

  • the provisions of a foreign law shall not be used if its implementation leads to consequences that are clearly incompatible with a public order in Ukraine;
  • usage of Ukrainian law is mandatory when directly stipulated by Ukrainian legislation; for instance, proprietary rights in respect of immovable and movable property located in Ukraine shall be governed exclusively by the laws of Ukraine; and
  • if the meaning of a foreign-law provision cannot be determined within a reasonable period, Ukrainian law shall be used.

An arbitral award against a company that is established in Ukraine will be enforceable in Ukraine without a retrial or examination of the merits of the case subject to the exceptions set forth in Article V of the New Convention on Recognition and Enforcement of Foreign Arbitral Awards dated 10 June 1958.

Foreign-court judgments will be recognised and enforced based on the reciprocity principle, unless Ukraine and the state of foreign court have executed a bilateral treaty. However, due to the lack of case law on the reciprocity principle or any clear explanations on its usage, it is highly recommended that setting a foreign court as a dispute resolution forum is avoided.

There are no other matters that might impact a foreign lender's ability to enforce its rights, except those previously specified.

Apart from a general insolvency process, an over-indebted company may use either:

  • financial restructuring (mostly designated for debtors with bank loans which amount to 50% or more of the debt portfolio); or
  • a pre-trial turnaround (similar to prepack/composition agreements or company voluntary arrangements (CVAs)).

From the date of the opening of insolvency proceedings, any enforcement (including over security) is available only within the insolvency case and is limited with a court/an insolvency trustee's/creditors' consent. As ipso facto clauses are not forbidden under Ukrainian law, commencement of insolvency proceedings against a principal borrower/debtor often triggers the guarantor/security-holder's duty to repay the principal debt.

The order in which creditors are paid upon a company's insolvency is as follows:

  • first class is for salary/pension claims and insolvency case expenses;
  • second class often consists of pension-fund duties;
  • third class is payment of taxes and state fees;
  • fourth class is for payment of general non-secured commercial creditors;
  • fifth class is for voluntary labour payment returns (quite a rare case in Ukraine) and
  • sixth class is for other non-secured claims, which are often commercial fines.

Secured claims are treated separately (out of any class) and are to be exclusively repaid from any exposure given by a security/collateral.

There is no concept of equitable subordination; Ukrainian remedial concepts for both creditors and shareholders are different.

As a rule, the insolvency of a borrower, a security-provider or a guarantor would lower the repayment ratio and delay the enforcement process. The debtor might also gain significant advantages from actively involving affiliated creditors in the creditors' voting process, which might result in imposing disadvantageous terms over non-affiliated creditors (such as partial write-off of the claims, prolonged repayment periods, etc).

Even though project finance is of the highest importance for Ukraine, due to the need for upgrading and developing local infrastructure, currently, project finance has not developed into a popular instrument of provision of financing. The main reason is the economic issues that Ukraine has been facing during the last few years, and which were exacerbated by the COVID-19 crisis, as well as political, legal and other risks.

Nevertheless, in recent years Ukraine has seen some project financing related to infrastructure projects in energy, storage, construction and transportation areas. Most projects were supported by international finance institutions, such as the EBRD, the IFC, the European Investment Bank (EIB), and the NEFCO. In recent years, investors from the capital markets have become more interested in this area, since the pension funds’ and insurance companies’ money needs long-term investments ensured by stable cash-flows. Local banks do not show eagerness to participate in such projects, due to the higher risks.

The main regulatory framework relating to project finance consists of:

  • the Civil Code of Ukraine No 435-IV, dated 16 January 2003;
  • the Commercial Code of Ukraine No 436-IV, dated 16 January 2003;
  • the Law of Ukraine "On Pledge" No 2654-XII, dated 2 October 1992;
  • the Law of Ukraine "On Mortgage" No 898-IV, dated 5 June 2003;
  • the Law of Ukraine "On Securing Creditors' Claims and Registration of Encumbrances" No 1255-IV, dated 18 November 2003; and
  • the Law of Ukraine "On the Regime of Foreign Investments" No 93/96-ВР, dated 19 March 1996, among others.

Even though Ukrainian legislation regarding public-private partnerships (PPP) is up to date and corresponds to international standards, PPP have not developed into a regular arrangement between public and private institutions. According to the statistics of the Ministry of Economy of Ukraine, as of 1 January 2021, only 192 agreements have been executed, of which 39 are being implemented and 153 are not.

The most notable public-private transactions in recent years were the concessions of Olvia and Kherson commercial seaports. Meanwhile, there are almost no projects in the areas of educational, health, and utilities.

A PPP may be realised by way of execution of the following agreements:

  • a concession agreement;
  • a property management agreement;
  • an agreement on a joint venture; and
  • other agreements.

In practice, concession agreements are preferred by the parties.

A private partner must be determined on a competitive basis. That means that the private investor that wishes to enter into a PPP has to file his or her bid with the relevant documentation. The public partner reviews the filed documents and chooses a winner from among all the bidders. Consequently, public and private partners enter into PPP documentation.

Legislation stipulates that the transfer of the object of PPP to a private investor does not entail the transfer of ownership title regarding the object to the private investor. The object must be returned to the public partner according to procedure, as specified in the respective agreement.

In the case that the winner of a tender is a legal entity that is not resident in Ukraine, it has to register as a legal entity in Ukraine for the execution of documentation within a PPP.

Upon a demand of the private investor or a lender, the state is entitled to refuse from immunity privilege under the PPP agreements. Such a refusal applies to all court decisions and arbitral awards, as well as to the enforcement of any such decisions/awards.

There are no specific taxes, fees, or other charges applicable to project finance transactions in Ukraine. However, in PPP transactions the public entity that initiated the PPP must organise a public tender. Depending on the documents submitted by bidders, it must choose a winner and execute the respective agreements.

Depending on the field of a project-finance transaction (mining, energy, construction, etc), different government or municipal administrative approvals or licences will be needed.

The main responsible government bodies in the field of oil and gas, power and mining are:

  • the Ministry of Ecology and Natural Resources of Ukraine;
  • the Ukrainian Geological Survey; and
  • the National Energy and Utilities Regulatory Commission.

The primary laws are:

  • the Code of Ukraine on Subsoils No 132/94-ВР, dated 27 July 1994;
  • the Law of Ukraine "On Oil and Gas" No 2665-III, dated 12 July 2001;
  • the Law of Ukraine "On the Natural Gas Market" No 329-VIII, dated 9 April 2015;
  • the Law of Ukraine "On Market of Electric Energy" No 2019-VIII, dated 13 April 2017; and
  • the Law of Ukraine "On Alternative Energy Sources" No 555-IV, dated 20 February 2003.

The main issue under the project finance transaction that parties will face is how to structure financing in the project. The financing structure is discussed in 8.6 Typical Financing Sources and Structures for Project Financings.

As for the form of the project company, it can be established either in the form of:

  • a joint venture;
  • a joint-stock company; or
  • a limited liability company.

In practice, a limited liability company is the most preferable form of a legal entity. This is due to easier establishment and management processes compared to other forms used. The law governing matters related to limited liability companies is the Law of Ukraine "On Limited and Superadded Liability Companies" No 2275-VIII, dated 06 February 2018.

Finally, Ukraine has entered into more than 75 bilateral investment promotion and protection agreements (BITs) with countries around the world. For instance, Ukraine has entered into BITs with Switzerland, Germany, USA, Japan, etc.

Currently, the main sources of project finance are:

  • long-term amortising bank loans; and
  • project bonds.

Both of these financing sources are often secured by the assets of the project company, as well as with its rights under project agreements.

Even though the provision of loans is more popular, the share of project bonds in the total financing volume of projects is gradually increasing. Project bonds were mostly used to finance projects in the fields of oil and gas, railways, ports, and telecommunications.

Loan documentation contains provisions preventing sponsors from selling their shares in the project (change of control clause), at least until the project is successfully launched. In most cases, violation of this condition leads to an event of default and the right of lenders to demand immediate loan repayment.

According to the Constitution of Ukraine, land, subsoils, water and other natural resources that are located within the territory of Ukraine belong to the Ukrainian people. The Government and municipal bodies perform rights of the owner in connection to natural resources on behalf of the Ukrainian people.

An investor can acquire ownership title over natural resources if the product-sharing agreement, executed with Ukraine in the person of the Cabinet of Ministers of Ukraine, stipulates such a possibility.

According to the Regulation of the Cabinet of Ministry of Ukraine No 1329, dated 28 December 2020, the following resources are subject to quotas' restrictions:

  • silver;
  • gold; and
  • waste or scrap of precious or metals.

As of now, the above-mentioned materials' quota amounts to 0 grams, meaning that export is forbidden. The list of these materials is updated on annual basis.

The following are some of the laws in connection to environmental, health and safety laws that may apply to projects:

  • the Code of Laws on Labour of Ukraine No 322-08, dated 10 December 1972;
  • the Civil Protection Code of Ukraine No 5403-VI, dated 2 October 2012;
  • the Law of Ukraine "On the protection of the environment" No 1264-XII, dated 25 June 1991;
  • the Law of Ukraine "On safety of labour" No 2694-XII, dated 14 October 1992
  • the Law of Ukraine "On securing sanitary and epidemic well-being of the population" No 4004-XII, dated 24 February 1994;
  • the Law of Ukraine "On fundamentals of Ukrainian legislation on health care" No 2801-XII, dated 19 November 1992; and
  • the Law of Ukraine "On high-risk facilities" No 2245-III, dated 18 January 2001.

Some regulatory bodies that supervise compliance with environmental, health and safety legislation are listed here:

  • the State Emergency Service of Ukraine;
  • the State Labour Service of Ukraine;
  • the State Environmental Inspection of Ukraine.
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Trends and Developments


Authors



Arzinger is a top-tier Ukrainian law firm, considered to be amongst the market leaders for the last 19 years. In Arzinger, there are 11 partners and 120 legal professionals. Arzinger has offices in Kyiv, Lviv and Odessa, which allows the firm to combine tailor-made advice with regional market expertise, as well as having a German desk. The firm is highly ranked within the industry. Arzinger's banking and finance team advises clients on all issues connected with financial services, including general bank lending (syndicated and bilateral), trade finance, project finance (infrastructure and industrial projects), equipment finance, capital markets, regulatory issues and debt restructuring (refinancing and restructuring of existing loans). The firm concentrates its activity mostly on complicated cross-border deals, which require extensive knowledge of local legislation and its practical implementation, as well as broad international experience.

COVID-19-Related Developments

For more than a year, public and private institutions have made a great effort to overcome the COVID-19 pandemic. On 30 March 2020, the Ukrainian Parliament adopted the Law of Ukraine "On Amendments to Certain Legislative Acts Aimed at Ensuring Additional Social and Economic Guarantees Connected to the Spread of Coronavirus Disease (COVID-19)" No 540-IX, which stipulated a prohibition to increase interest rates under loan agreements during quarantine. This restriction is aimed at securing borrowers from potential risks that may be caused due to the pandemic.

Moreover, the National Bank of Ukraine recommended that commercial banks introduce a special grace period for loans issued to individuals and businesses to cover the quarantine period (credit holidays). This special grace period can be offered to those borrowers that satisfy certain requirements regarding their inability to perform their obligations under their loan agreements.

It is worth noting that, at the beginning of the COVID-19 pandemic, large numbers of professionals expected an increase in the number of restructuring deals and insolvency cases in the second half of 2020. However, it turned out to be the opposite. Large companies showed resilience to the pandemic and managed to deal with the crisis.

Foreign Exchange Regulation Liberalisation

2018 marked a new chapter in foreign-exchange regulation of Ukraine. Before, cross-border transactions were subject to the Cabinet of Ministers’ Decree of 1993, which set a large number of restrictions and prohibitions that affected loan transactions, among others. However, the new Law of Ukraine "On Currency and Currency Transactions" No 2473-ІІІ dated 21 June 2018 declared the liberalisation of the Ukrainian foreign exchange market and a movement to a free capital flow system.

In pursuance of this Law, the National Bank of Ukraine has cancelled a number of its previous regulations and adopted new ones, regulating all aspects of legal relations in the field of foreign currency circulation and transactions with it. Moreover, additional easements are being introduced by the National Bank of Ukraine from time to time.

The following are the most important changes that became effective and have connection to cross-border financing transactions and business activities of companies established in Ukraine in general:

  • the possibility for legal entities to purchase foreign currency in the amount of no more than EUR100,000.00 (or its equivalent in another currency) within one day without any grounds/obligations;
  • the possibility of early repayment under cross-border loans;
  • the possibility to use currency forwards and SWAPs;
  • the possibility to buy and accumulate foreign currency for the purpose of payments under cross-border loans and repayment of bonds;
  • the increase of a threshold for the transfer of funds abroad by Ukrainian individuals, from EUR100,000.00 to EUR200,000.00;
  • the cancellation of the requirement to register cross-border loan agreements with the NBU and the lifting of the interest rate ceiling;
  • free payment abroad under a suretyship.

With regard to cross-border borrowing, loan agreements with foreign lenders, as well as amendments and assignment agreements in regard to those loan agreements, were subject to mandatory registration with the NBU (except for certain exceptions). This procedure could last up to two months, entailing additional risks for the lender and the borrower. However, the registration was substituted by a simple notification of the National Bank of Ukraine via a local servicing bank. Under the Regulation of the National Bank of Ukraine No 6, dated 2 January 2019, the local servicing bank has five business days to notify the National Bank of Ukraine. Notwithstanding this, in practice, banks usually render all formalities within one to two business days.

In addition, local companies were not allowed to purchase and accumulate foreign currency on their bank accounts without any grounds/obligations for such a purchase, but, recently, the National Bank of Ukraine has adopted changes under which Ukrainian companies can purchase foreign currency even if they do not have grounds/obligations. This allows local companies to manage risks and liquidity more effectively.

Finally, even though significant improvements have been made so far, fundamental liberalisation has a long way to go. Restrictions and prohibitions imposed by the National Bank of Ukraine depend on market conditions, political and economic stability, meaning that everything can go one way or another.

"Split" Law

The Ukrainian financial market has been regulated on a "multi-pick" basis. Powers to regulate and supervise different sectors of the financial industry were divided between several government bodies. Until July 2020, there were the following involved authorities:

  • the National Securities and Stock Market Commission – responsible for regulation and supervision of securities market and its participants;
  • the National Bank of Ukraine – responsible for regulation and supervision over the banking industry and banks; and
  • the National Commission for Regulation of Financial Services – responsible for regulation and supervision over pawn shops, credit unions, insurance, leasing and other finance companies.

However, the National Commission for Regulation of Financial Services did not prove itself to be an effective government body. The non-banking financial industry remained untransparent, formalised and without adequate legal regulation.

Consequently, the Ukrainian Parliament adopted the Law of Ukraine "On Amendments to Certain Legal Acts of Ukraine Regarding Improvement of Functions of State Regulation of a Financial Services Market", dated 12 September 2019 No 79-IX, better known as the "Split" Law, that took effect on 1 July 2020.

The law liquidated the National Commission for State Regulation of Financial Services Markets and split the regulation of financial markets between the National Bank of Ukraine and the National Securities and Stock Market Commission, as follows:

  • the National Bank of Ukraine became a regulator of insurance, leasing, financial companies, credit unions, pawn shops and the credit history bureau; while
  • the National Securities and Stock Market Commission now regulates and supervises non-state pension funds and construction financing funds.

The current trend shows that the National Bank of Ukraine is aiming to clear the non-banking financial market of untransparent and unviable financial institutions. According to official statistics, within a year the overall number of non-banking financial institutions decreased from 2,089 to 1,933. It is expected that further decreases will continue.

Capital Markets Developments

On 1 July 2021, the Law of Ukraine "On Amendments to Certain Legislative Acts of Ukraine Concerning the Simplification of Attraction of Investments and the Introduction of New Financial Instruments" No 738-IX, dated 19 June 2020, came into full force. Even though certain provisions of the new law came into force on 16 August 2020, its main provisions took effect only recently. The above-mentioned law fully restates the Law of Ukraine "On securities and stock market" No 3480-IV, dated 23 February 2006 (new name – the Law of Ukraine "On Capital Markets and Organised Commodities Markets").

Some changes have a direct relation to project financing and the bond market of Ukraine. First of all, new financial instruments were introduced, including the following.

  • Credit notes – a bond that certifies the issuer's obligation to pay interest income to the owner of the security in the amount and terms indicated in the prospectus, provided that there was no event related to the solvency of the third party specified in the prospectus. If the solvency event occurs, the owner is deprived of the right to receive interest income, while the issuer is obliged to repay the owner of the note its nominal value.
  • Green bonds – bonds issued for the purpose of the realisation or financing of a project that has an environmental purpose. A project of environmental purpose is a project in the field of alternative energy, energy efficiency, minimisation of waste-generation, utilisation and processing, the introduction of environmentally friendly transport, organic farming, the conservation of flora and fauna, water and land resources, adaptation to climate change, as well as other projects aimed at environmental protection, implementation of environmental standards, and reduction of emissions into the environment.
  • Infrastructure bonds – bonds issued for the purpose of the realisation or financing of an infrastructure project. An infrastructure project is a project connected to the construction (reconstruction, repair) of facilities in the areas of:

a) transport infrastructure (roads, bridges, crossings, etc);

b) gas pipelines;

c) social culture (health, education, social facilities); or

d) housing (water and sewage facilities, heat and power supply systems, etc).

Moreover, new wording of the law significantly widens the rights of bond-holders by way of the introduction of more detailed regulations and new concepts. The following are the most important changes.

  • Specifications of differences between qualified and non-qualified investors have been added. Intuitively, non-qualified investors have a higher level of protection compared to those who are qualified.
  • New rules of holding a meeting of bond-holders were introduced. This meeting provides owners with a right to pass a resolution that is mandatory for the issuer. Any such resolution must be passed by a majority of votes.
  • The concept of administrator has been presented. In addition to a meeting of bond-holders, they or an issuer of bonds can appoint an administrator, who will act on the owners' behalf and will have a duty of care towards them. The administrator is authorised with the following powers:

a) to monitor compliance of the issuer and the security-provider with their obligations;

b) to participate in court, enforcement and bankruptcy proceedings (against the issuer and the security-provider);

c) to act as claimant in court proceedings on behalf of the bond-holders; and

d) to take any other action on behalf of the bond-holders if duly authorised by the resolution of the bond-holders' meeting.

These changes provide Ukrainian business with new opportunities that may be used, among others, in raising funds. However, currently, the law lays down more of a basis for further development. The National Securities and Stock Market Commission still has to draft and adopt new regulations in order to satisfy the updated requirements.

Arzinger

Senator Business Centre
32/2 Moskovska street
Kyiv
Ukraine

+38 044 390 55 33

+38 044 390 55 40

pr@arzinger.ua Arzinger.ua
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Law and Practice

Authors



Arzinger is a top-tier Ukrainian law firm, considered to be amongst the market leaders for the last 19 years. In Arzinger, there are 11 partners and 120 legal professionals. Arzinger has offices in Kyiv, Lviv and Odessa, which allows the firm to combine tailor-made advice with regional market expertise, as well as having a German desk. The firm is highly ranked within the industry. Arzinger's banking and finance team advises clients on all issues connected with financial services, including general bank lending (syndicated and bilateral), trade finance, project finance (infrastructure and industrial projects), equipment finance, capital markets, regulatory issues and debt restructuring (refinancing and restructuring of existing loans). The firm concentrates its activity mostly on complicated cross-border deals, which require extensive knowledge of local legislation and its practical implementation, as well as broad international experience.

Trends and Development

Authors



Arzinger is a top-tier Ukrainian law firm, considered to be amongst the market leaders for the last 19 years. In Arzinger, there are 11 partners and 120 legal professionals. Arzinger has offices in Kyiv, Lviv and Odessa, which allows the firm to combine tailor-made advice with regional market expertise, as well as having a German desk. The firm is highly ranked within the industry. Arzinger's banking and finance team advises clients on all issues connected with financial services, including general bank lending (syndicated and bilateral), trade finance, project finance (infrastructure and industrial projects), equipment finance, capital markets, regulatory issues and debt restructuring (refinancing and restructuring of existing loans). The firm concentrates its activity mostly on complicated cross-border deals, which require extensive knowledge of local legislation and its practical implementation, as well as broad international experience.

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