Some of the new measures seem overly restrictive

In response to the continued slide of the hryvnia (which hit UAH 32/USD yesterday) the NBU has introduced new FX market restrictions to dampen demand for foreign currency and help stabilize the market. The regulator stressed that fundamental factors are playing a limited role in the ongoing hryvnia depreciation and that the trend is being driven by panic. The central bank also noted that some of the restrictions may be lifted after Ukraine receives an IMF tranche. In a separate move, the NBU is aiming to introduce rigid legislation making shareholders responsible for bank insolvencies and offering the NBU discretion to label any borrower as a related party to a bank. While this is a welcome move in the long-run, it may cause material problems for banks and their clients if implemented immediately and in the currently proposed format.

NBU strengthens administrative controls to slow hryvnia's decline

Effective today:

- Importers can borrow only in foreign currencies to pay for imports or use their own hryvnia to purchase USD or EUR.

- Importers will need to obtain a permit from the NBU for import prepayments in excess of USD 50,000. All import payments of above USD 0.5 mln can only be settled based on letters of credit from investment-grade foreign banks.

In addition to those new restrictions the NBU will maintain other measures that were introduced back in 4Q14:

- Companies (incl. exporters) must sell 75% of their FX sale proceeds.

- Any early redemption of FX debt provided by non-residents is prohibited.

- FX purchases for repatriating dividends abroad are banned

- Cash FX purchases are limited to the equivalent of UAH 3,000/person/day – less than USD 100 at the current market rate. FX purchases are unlimited if the money is immediately used for loan repayment. FX deposit withdrawals are limited to the equivalent of UAH 15,000/day (less than USD 500 at the current exchange rate).

Draft law on related parties may cause difficulties for borrowers

On another front, the central bank has initiated a new package of legislation to enhance bank shareholder and management responsibility for future bank insolvencies and related party lending. The draft law outlines two major requirements that reshape the current rules of the game:

- Bank management and beneficiary owners will be obligated to compensate the losses of depositors, bank creditors, and the state if they are found responsible for an insolvency. The compensatory power of the new legislation will extend to all the assets of management and owners.

- The NBU will have the power to identify individuals and companies as related parties to banks based on a wide range of extremely loose criteria. Under the proposed rules, any company in which a shareholder also owns a stake in a bank faces the risk of losing credit money if they are named a related party of a particular bank. Banks would need to immediately scale back lending to those companies to meet the regulatory requirements.

While we believe all of the above initiatives are positive in the long-run, they may negatively affect existing businesses and their shareholders (including foreign investors) if implemented in the suggested form and immediately. A reasonable transition period may be needed before introducing the new rules to ensure all borrowers have sufficient time to adjust existing funding plans and to allow banks time to re-balance lending portfolios.