Foreign Exchange Liberalization and Introduction of a Common EU Financial Market: Performance Monitoring

20 November 2018

In 2018, after 25 years of the outdated “post-Soviet” currency regulation, as well as 3 years of “draconian” restrictive measures that were implemented as a response to the economic crisis of 2015, Ukraine finally got a chance for currency liberalization – in summer, the Verkhovna Rada of Ukraine backed a new law “On Currency and Currency Transactions””.

The adoption of this law is an important intermediate result on the path of Ukraine to the European integration. Further, the Ukrainian regulation should be brought into line with the EU Directives and Regulations, including the conditions for capital flows.

Over the years of its independence, Ukraine has received 10 times less of foreign capital than the Czech Republic, four times as less as Poland, and even 70% less than Albania and Bosnia. After the 2014-2015 crisis, which was accompanied by the restrictions on outflow of capital and dividends, foreign direct investment in the non-banking sector in Ukraine has not fully recovered. The quarterly inflow amounted to an average of $ 400 million over the last four quarters. For comparison, in 2010-2013, the average quarterly figure was $ 1.3 billion. A survey of investors shows that in addition to such well-known problems as war and corruption, the obstacle to investing money is also a limitation of the capital flow. This problem has shifted from 5th to 9th position in terms of importance after removing some restrictions. However, it is still relevant.

Does Ukraine fulfil its obligations under the Association Agreement in the area of capital flows and financial services? What norms have already been implemented, and what norms need to be worked on? What will the new regulations of the NBU contain – the old restrictions under the ‘new dressing’ or the norms of European Directives?

To answer these questions, the Centre for Economic Strategy is launching a study to monitor the status of regulating the capital flows and financial markets, and to assess its compliance with the Association Agreement between Ukraine and the European Union.

The study will consist of 2 parts:

Part 1 is an assessment of the new normative regulation after the implementation of the Law “On Foreign Currency and Currency Transactions”.

Part 2 is the analysis of the European regulations and practices of foreign economic operations in the European countries (the case studies of “new” EU countries included);

Based on the study findings, there will be made an assessment of the status of the updated currency regulations in Ukraine after the adoption of the new law “On Currency and Currency Transactions” and the compliance of the new regulation with the terms of the Association Agreement.

The research was prepared with the support of the International Renaissance Foundation.

For reference

With the EU technical assistance project ‘EU Finstar’ and the European and Ukrainian experts, the National Bank of Ukraine has developed and the President of Ukraine has submitted to the Verkhovna Rada a draft law “On the Currency”, which was adopted in June 2018. This law allows making further actions in the field of European integration through the liberalization of capital flows.

The Centre for Economic Strategy has been involved in the work on the draft law “On Currency” since 2015, as well as on the development of a roadmap for currency liberalization which is valid now in the NBU. The project “Foreign Exchange Liberalization and Introduction of the Financial Market Common with the EU”: monitoring of its implementation is carried out with the financial support of the European Union and the International Renaissance Foundation within the grant component of the project “Public Synergy” under the auspices of the Ukrainian National Platform of the Eastern Partnership Civil Society Forum. The materials published on this page are solely responsibility of the Centre for Economic Strategy and do not necessarily reflect the views of the European Union or the International Renaissance Foundation.