Foreign holders of Ukrainian domestic government bonds will be able to transfer abroad only proceeds of coupon payments after 1 April 2023
Key takeaways:
- Foreign investors holding Ukrainian domestic government bonds will be allowed to repatriate proceeds of payment of interest on domestic government bonds falling after 1 April 2023;
- The NBU resolution comes as a change to its earlier decision issued in May 2022 to allow repatriation of proceeds of payment of both interest and principal on domestic government bonds falling after 1 April 2023;
- The amended exemption seems to omit the return received by investors as a result of the original issue discount on zero-coupon domestic government bonds.
On 22 March 2023, the National Bank of Ukraine (the “NBU”) updated its decision relating to the ability of foreign investors holding domestic government bonds (“DGBs”) to transfer the proceeds of their investment out of Ukraine.
Previously existing rule was introduced by the NBU in May 2022 as an exemption to broad restrictions on capital outflow from Ukraine imposed at the outbreak of the full-scale Russian aggression against Ukraine. The 2022 exemption provided that foreign investors will be allowed to convert into foreign currency and transfer from Ukraine proceeds of repayment of principal and payment of interest on DGBs made after 1 April 2023 in accordance with the terms and conditions of the bonds. Introducing this exemption aimed at “encouraging non-residents to purchase hryvnia-denominated DGBs”, including through reinvestment of the earlier proceeds.
In March 2023, following consultations with the IMF and the Ministry of Finance of Ukraine, the NBU modified the scope of the exemption. Under the modified version of the rule, foreign holders of the DGBs:
- will be able to convert into foreign currency and/or repatriate proceeds of payment of interest on DGBs falling after 1 April 2023 according to the terms and conditions of the bonds;
- will not be able to convert into foreign currency and/or repatriate proceeds of repayment of principal on DGBs.
Based on the revised version of the exemption, it also follows that investors in zero-coupon DGBs will not be able to convert into foreign currency and/or repatriate the return on the bonds resulting from the original issue discount.
According to the NBU, the exemption revision is based on the updated assessment of the security and macroeconomic risks which remain high and are expected to lower at the beginning of 2024.
The NBU estimates that the amount of scheduled interest payments on the DGBs to foreign investors between 1 April 2023 and the end of 2023 will amount to approximately USD 120 million subject to the potential increase in case of any additional purchases by foreign investors of the DGBs with interest payments due after 1 April 2023.
The above amendments together with certain other clarification became effective on 23 March 2023 introduced by NBU Board Resolution No. 29 dated 22 March 2023 “On Amendments to NBU Board Resolution No. 18 dated 24 February 2022”.
