How the latest restrictions on foreign exchange transactions have impacted Ukraine’s ICT sector

On September 22, the National Bank of Ukraine (NBU) adopted Resolution No. 591, which introduced significant changes to the Foreign Exchange Transaction Rules for Ukrainian banks.

In addition to restrictions applied to foreign exchange purchases by individuals, the resolution, directly or indirectly, has had an impact on many Ukrainian business sectors and on foreign companies in Ukraine cooperating with foreign partners. Ukrainian IT companies cooperating with foreign customers, contractors, or owners have been concerned, too.

Although these measures were adopted for a limited period of time – due to expire in the next few days or weeks – there are reasons to believe that the NBU will prolong their effect. Let’s take a look at the most significant of them:

The following activities may not be undertaken on or before December 2, 2014:

  • Payment of dividends to foreign investors. In fact, foreign owners of Ukrainian IT companies will be unable to receive dividends for the third quarter of 2014 before December 2.

The following activities may not be undertaken on or before November 21, 2014: 

  • The amount of foreign exchange proceeds subject to mandatory sale is reduced from 100% to 75%, enabling IT companies to reduce losses from foreign exchange differences in the event of payroll transactions and to keep part of their proceeds in foreign currency.
  • The banks must sell this portion of foreign exchange earnings (75%), without an order by the customer, on the first working day following the date the funds are credited to the customer’s account. This approach will limit companies’ imports of foreign exchange proceeds to Ukraine.
  • The NBU’s control has increased over foreign exchange transactions: from now on, the NBU may suspend risky transactions and require a set of supporting documents from the bank, which in turn is required to obtain said documents from the customer.

Impact on the ICT sector

When the CFO of a large international IТ company with business operations in Ukraine learned about new foreign exchange control changes introduced by the NBU, she, with characteristic impulsiveness, gave a clear and concise response, which included a swearword.  As it turned out, the new restrictions on foreign exchange transactions did not have a catastrophic impact on the company’s business, as they applied only to a small number of transactions. But though the issue was resolved, it left, as they say, a bad taste in the mouths of her colleagues.

As a result of our experience dealing with companies operating in this sector, we can guess that innate caution, an entrepreneurial instinct, or painful past experiences have driven many companies to avoid (when possible) interactions with Ukraine’s financial system by importing foreign exchange proceeds and making payments to foreign contractors. However, the new restrictions make it difficult to carry out certain operations, and may drive a switch to electronic money.

First of all, companies focused on the domestic market who have been given the right to use intellectual property, e.g. various software solutions, face additional challenges These companies receive income mainly in Ukraine, but are constrained in making payments directly to their parent company or to the owner of the intellectual property. Thus, a number of Ukrainian subsidiaries of global companies are hostages of circumstance today.

Export-oriented companies, as well as those focused on the domestic market but which receive income from foreign fees, are ensnarled in a less complicated situation, since these companies simply do not import foreign exchange proceeds to Ukraine unless they are urgently needed.

Generally speaking, the new restrictions may have the following impact on the sector’s financial inflows in the immediate future:

  • Potential need to restructure financial flows, e.g. proceeds in foreign currency that were previously imported directly to Ukraine will be kept outside Ukraine when possible; also a partial switch to e-money and alternative payment schemes;
  • Limitations and additional costs (bank fees or costs related to double conversion) related to fulfilling (making payments under) pre-existing contracts for paying invoices issued to Ukrainian legal entities;
  • Restrictions on dividend payments to foreign investors, though this is not common practice, at least formally.

Boosting foreign exchange inflows rather than restricting outflows

The reasons for the NBU’s introduction of these restrictions are clear and well-grounded. It is no secret that imports of various services were often used to repatriate profits and optimize tax burden management. We hope that such unprecedented steps will limit tax loopholes and contribute to the stabilization of the national currency, which will have a positive impact on Ukraine’s economy as a whole, while at the same time not inflicting destructive effects on the operations of companies in the field of intellectual property in the long run.

It should be kept in mind that many IТ companies are deeply integrated with global business. Any restrictions on foreign exchange transactions create obstacles for operations and require further efforts to restructure business processes, foreign exchange settlements, and control over foreign exchange positions. Moreover, this is one of the few sectors of Ukraine’s economy still developing against all odds, due to the high intellectual promise of our people. However, many companies operating in various IT and communication segments in the international market prefer not to import funds and foreign exchange proceeds to Ukraine without a pressing reason or need to finance operating costs in the country.

Consequently, the #zhytyponovomu agenda, including currency controls, should include the issue of boosting foreign exchange inflows rather than restricting outflows as well as motivating ICT companies to increase financial inflows to Ukraine.

Alexey Aristov is Director and TMT Leader at Deloitte Ukraine.

Topics: Analysis & opinion, International, Legal, Legislation & regulation, Taxes
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