Ukrainians are bypassing NBU currency restrictions with assistance from the U.S. government. Here's the regulator's response.

For nearly three years, Ukraine has been living under strict currency restrictions imposed by the National Bank since the first hours of the large-scale war. Most of these restrictions are still in effect today.

At the beginning of 2024, several major business groups, including "Metinvest," "Interpipe," "Kernel," DTEK, and Vodafone, attempted through the government to persuade the National Bank to partially lift some of its restrictions in order to settle external debts. Ultimately, the NBU listened to the business community and introduced a large package of currency relaxations.

However, the problem has not disappeared globally. Foreign companies still cannot transfer their profits earned in Ukraine abroad, and domestic enterprises are unable to withdraw funds to access international markets. At least, such a prohibition exists officially.

What is a limitation for some becomes an opportunity for others. Over the past few years, a market of various schemes has emerged in Ukraine, enabling individuals and companies to bypass the NBU's restrictions. Perhaps the most common method to achieve this is through cryptocurrency. However, this approach is not suitable for everyone.

The NBU has taken notice of a "scheme" involving three major players in Ukraine's securities market. The increased scrutiny from the National Bank is already affecting their business processes, despite the fact that the banking regulator has no authoritative powers in the stock market.

How can one circumvent the NBU's restrictions on capital outflows, and what does the U.S. Department of the Treasury have to do with it?

Bypassing Restrictions with the Help of the U.S. Government

In early December 2024, the National Bank sent a letter to all Ukrainian banks (a copy of which was reviewed by EP), outlining what it considers to be a "scheme for circumventing currency restrictions."

The letter pertains to three investment companies: LLC "Dominanta Trade," LLC "Univer Capital," and LLC "Investment Capital Ukraine" (ICU group). The NBU has previously had public conflicts and even legal disputes with the latter.

How does the scheme work? Clients of the investment companies purchase U.S. government bonds (so-called treasuries), which are approaching their maturity date. Since these securities are admitted to trading on the Ukrainian market through individual decisions by the National Securities and Stock Market Commission (NSSMC), their purchase occurs in hryvnias.

Once the treasuries are in the client’s account in Ukraine, they instruct the company to transfer these bonds to a securities account in a foreign depository (an institution that keeps records of rights to securities). When the maturity date arrives, the client receives foreign currency from the U.S. government in their bank account abroad.

Thus, as the NBU notes, it has "suspicions that U.S. bonds acquired by individual and legal entities through investment firms are being transferred abroad before their maturity date to enable these clients to receive funds in foreign currency outside of Ukraine." In other words, the National Bank suspects the mentioned investment companies of circumventing existing currency restrictions.

Consequently, in its letter, the regulator "recommends banks to increase their scrutiny" of the operations of investment companies and to "ensure proper monitoring of financial transactions and activities of such clients."

What Are the Scales of Circumventing Restrictions

The use of U.S. bonds to bypass the NBU's currency restrictions is not a new story for Ukraine. Several sources in the EP from the stock market and financial regulators note that such operations have been conducted since 2022.

Acquiring American bonds and transferring them abroad is possible not only through the three investment companies mentioned in the NBU's letter. Other Ukrainian brokers also offer such services. However, these three companies account for the largest share of such operations, as explained by sources in the market.

Recently, the volume of transactions involving American bonds may have significantly increased, which drew the NBU's attention and prompted it to send the aforementioned letter to banks.

For instance, sources in the EP from the stock market indicate that in September 2024, the trading volumes of foreign bonds in Ukraine exceeded the volumes of transactions with Ukrainian bonds abroad. In that month, they nearly tripled, reaching 27.6 billion hryvnias (equivalent at the NBU rate).

As explained by one investment company suspected by the NBU of circumventing currency restrictions, using U.S. treasuries to withdraw capital from Ukraine is not a cheap endeavor.

These securities must first be brought into the Ukrainian market and approved for trading, which may take several days. Afterwards, they are traded on domestic stock exchanges at an inflated rate, as sellers include a certain premium in the price. Additionally, clients must remember the fees they have to pay to the broker for purchasing and transferring American bonds abroad.

The final cost of withdrawing funds using U.S. government bonds can amount to 5-10% of the total sum. Therefore, such operations are typically utilized only by large clients who require that the withdrawn capital has a legal origin and can pass the financial monitoring of foreign banks.

How the NBU's Letter Affects Business

Despite the fact that the National Bank's letter to commercial banks was sent exclusively to banks, both "Univer" and "Dominanta Trade," as well as ICU, were aware of its existence. In fact, so were all professional participants in the stock market with whom the EP spoke while preparing the material.

In their defense, the investment companies emphasize that they conduct legal activities in accordance with current legislation and do not violate any restrictions. Moreover, they highlighted that they cannot refuse to transfer treasuries abroad at the client's request, as such a refusal would lead to the loss of their licenses.

It is noteworthy that none of the three companies agreed to officially comment on the NBU's letter regarding them. However, they have already begun to feel its repercussions. In particular, two of them reported a slowdown in banking services. In some cases, banks outright refused to transfer client funds to the investment company’s account for purchasing securities, not just foreign ones.

"Recently, an individual investor attempted to transfer funds to acquire government bonds, but the financial monitoring of the bank where he holds an account refused to execute the payment and requested additional documents that should not be required for such routine operations. This demand was explained by the bank as a precaution against potential illegal capital outflow," said a representative of one of the companies to EP.

EP sent an inquiry to the National Bank regarding the letter, but no response was provided by the time this material was published. The banking regulator also did not comment on what the order of actions should be for banks concerning the investment companies mentioned in its letter.

Bypassing Political Risks

Why are treasuries used specifically for transferring funds abroad, if any foreign securities could suffice for such operations?

These bonds are the most liquid asset on the international stock market, possessing a predictable and stable price. Additionally, they are issued by the Ministry of Finance of Ukraine's key partner. Consequently, any decisions that might limit their circulation carry political risks for the National Bank.

"Imagine the reaction of the American embassy when they learn that the NBU is trying to restrict or prohibit Ukrainian investors from investing in U.S. government debt," said a manager from one of the companies mentioned in the NBU's letter.

Apparently, this is why the NBU decided to counteract the schemes discreetly by sending "recommendation letters" to banks. After all, this is not the first instance where the NBU has avoided negative political repercussions for its decisions. Recently, it achieved a reduction of limits on citizen transfers by framing this decision through a memorandum agreed upon by the banks themselves.

Despite the political risks, a decision to restrict operations with American bonds is still being prepared. However, it will be made not by the NBU but by the relevant regulator - the NSSMC. The latter has been actively discussing with the National Bank for at least the past six months, defending the free cross-border circulation of securities.