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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 In the middle of the crisis, short-term investments were very volatile: They could be withdrawn suddenly at any bad news, creating disorder and panics.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.

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