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11 July 2018

A win for business! Special sanctions canceled

Here you can find Ukrainian and Russian versions.

The mechanism of special sanctions will be subject to abolition from 7 February 2019, seven months after the Law of Ukraine “On Currency and Monetary Operations” became effective[1]. Currently, the Ministry of Economic Development and Trade of Ukraine (“the Ministry”) imposes special sanctions on Ukrainian business entities engaged in foreign economic activity and on their foreign counterparties pursuant to Art. 37 of the Law of Ukraine “On Foreign Economic Activity” (“the Law”).

How do special sanctions affect business?

Special sanctions are an archaic and unjustified mechanism for combatting violations connected with foreign economic activity. In fact, these sanctions are a mechanism of questionable effectiveness that may be more likely to injure prudent companies. Furthermore, there are no laws anywhere except Ukraine that envisage the above mechanism.

According to the effective laws, special sanctions are imposable against both resident and non-resident companies in the form of (1) temporary suspension of foreign economic activities, (2) individual licensing regime, and (3) a fine.

The Law defines possible violations in broad terms, including violation of the rules of currency control, customs, tax and other legislative provisions connected with foreign economic activity, as well as actions that may threaten national economic interests. The most “popular” grounds for imposition of special sanctions are breaches in the terms of foreign currency payments in export operations[2], breaches of import terms in deferred delivery operations[3], and violation of rules connected with customs clearance and customs valuation[4].

Pursuant to the effective laws, the Ministry does not inform the company on the imposition of special sanctions. Furthermore, a company’s representatives cannot participate in the procedure for imposition of sanctions. The only way to enquire about the imposition of special sanctions is to monitor the webpage of the Ministry. The company may also find out about applied special sanctions directly via a bank or at the customs office when informed of bans on its foreign economic operations. Moreover, according to the current rules, special sanctions are imposed not only to the violating party but also to its diligent counterparty, and may be effective with no time limit. The cancellation of sanctions is not a transparent process and can take several months. Thus, companies may lose the possibility to engage in foreign economic activity, suffering losses from breached contracts, without any real chance to influence the situation.

Business communities have raised sensible questions regarding special sanctions for a long time. Therefore, cancellation of Article 37 of the Law shall be deemed a truly deserved victory.

The cancellation of Art. 37 of the Law is a crucial step in the process towards liberalization of foreign economic activity, which facilitates activities of Ukrainian exporters and importers. Removing the risk of sanctions is likely to promote transparency in foreign economic activities while improving the predictability of the business environment.

Please contact Anzhela Makhinova or Ivan Baranenko for further information.

[1] The Law of Ukraine “On Currency and Operations Connected with Currency” became effective on 7 July 2018.

[2] Article 1 of the Law of Ukraine “On Procedure for Settlements in Foreign Currency”

[3] Article 2 of the Law of Ukraine “On Procedure for Settlements in Foreign Currency”

[4] Articles 51, 260-261 of the Customs Code of Ukraine.

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