Frequent and sudden changes to legislation raise concerns among potential and existing investors. At the same time, doing nothing against the fall of the hryvnia and capital outflow is also damaging to investors, who expect the government to take reasonable measures to defend the economy and thus their investments. This can often create a dilemma.
In 2009, in an effort to stem the outflow of capital and to prevail against currency speculation, the Ukrainian parliament passed Law No. 1533. This law, which came into effect on Nov. 24, significantly changed the rules of the foreign investment regime in Ukraine. Among other measures, the law re-introduced mandatory registration of foreign investments, special investment accounts and mandatory conversion of investment proceeds into the Ukrainian national currency. It also banned early repayment of foreign borrowings.
The measures were meant to limit short-term capital inflow (bearing in mind that mandatory registration would not be perceived as an obstacle to long-term industrial investors). In the middle of the crisis, short-term investments were very volatile: They could be withdrawn suddenly at any bad news, creating disorder and panics. The legislation probably succeeded in impeding no-risk investments against Ukraine through high-yield hard currency investment deposits in Ukraine.
But the spillover effect on Ukrainian banks was significant; Ukrainian banks were deprived of attracting foreign currency via investment deposits because investors, now obliged to convert their cash into local currency, were reluctant to take up the risk of further hryvnia devaluation. Now that the worst of the crisis seems over, the return of short-term inflows could be a longer-term financing tool for Ukraine and its banking system.
Long-term investors were also affected by the ban on early repayment of foreign borrowings. This made re-financing and restructuring hard to implement. This unexpected restriction on loan restructuring caught many investors by surprise, because investment strategies, including debt financing, took into account the possibility of early repayments.
On April 27, with the economy showing signs of recovery and the presidential election cycle completed, the parliament passed Law No.6122, which lifted the ban on early repayment of foreign borrowings, cut the red tape of compulsory registrations and mandatory conversions into the national currency of Ukraine. The law was signed by President Viktor Yanukovych on May 14.
It is impossible not to welcome the lifting of irritating measures that caught investors by surprise. But avoiding such surprises will have a positive impact on foreign investors only to the extent that investors believe Ukraine will not do it again.
Arguably, foreign investors might have taken into account the possibility of changes in the rules of the game when investing. If so, neither imposing nor lifting such measures are likely to have had an influence on investors’ perceptions of Ukraine. The real issue for Ukraine is to give a credible commitment on the stability of its legal environment as a whole and not only some specific regulations.
Let us hope that the prompt lifting of the limitations demonstrates that the Ukrainian government cares about creating an investor-friendly atmosphere of confidence and predictability.
Olena Polyakova is a lawyer with PricewaterhouseCoopers Ukraine. She specialises in banking and finance, competition and antitrust, and commercial law. She can be reached at firstname.lastname@example.org.