From today, the National Bank of Ukraine is changing currency rules to reduce demand for the dollar

The National Bank of Ukraine is changing currency rules from February 21 to reduce the demand for the dollar.

After yesterday’s devaluation of the hryvnia, the National Bank is attempting to decrease the demand for the dollar in the non-cash market.

To achieve this, on the evening of February 20, it issued new changes to the currency rules through its resolution No. 24.

The new document prohibits banks from purchasing foreign currency for enterprises that already have the required amount of foreign currency funds in their accounts. In practice, this means that every purchasing company must provide the bank with a full report (officially certified statement) on the balances of funds in all currency accounts – current, deposit, as well as on currency swap operations. If there are sufficient funds on these accounts to pay for the current currency contract, the bank will refuse the company’s purchases of dollars/euros in the non-cash market.

The amount of payment will also be assessed. For example, if a company needs to pay $5 million for imported purchases, but it only has $1 million in its accounts (if all accounts are consolidated), the bank will only be able to buy the missing $4 million for this import contract, not the entire $5 million as was previously possible. Interestingly, the National Bank of Ukraine has included currency swaps here to prevent businesses from circumventing the restriction.

A swap is a currency transaction that involves a reverse deal in the future. A company with $1 million in its accounts could quickly enter into a currency swap agreement with the bank to circumvent the restriction. This swap would involve the company selling its bank a conditional million dollars right now (exchanging it for hryvnias), but with the condition of obligatory return (reverse deal) of this million, say, in a week.

This way, the company can pretend that it has no currency in its accounts and provide statements with zeros in the dollar column, demanding the purchase of the aforementioned $5 million. However, the National Bank has anticipated this loophole and immediately demanded that financiers verify both swap deals and count their amount as the company’s available currency.

The National Bank also demanded that financial institutions continue to conduct currency control over all incomplete export contracts until exporters receive the full amount from foreign partners specifically in foreign currency. It also prohibited ending such currency control if foreigners close export contracts not in foreign currency, but in hryvnias.