The response of the Ukrainian banking sector to the Ukraine-Russia conflict

Wednesday 4 May 2022

Oleksander Plotnikov

Arzinger Law Firm, Kyiv


2021 was the most successful year for the Ukrainian banking sector since the 2008 financial crisis. The financial results of the leading banks and of the core sectors of the Ukrainian economy gave a lot of optimism for 2022, which was expected to become a year of active economic growth and further developments towards European markets.

However, these optimistic expectations have been severely affected by the Russian invasion of Ukraine. It is expected that the drop in Ukrainian gross domestic product in 2022 will be at least 30 per cent in comparison with 2021. Moreover, it is reported that around 85 per cent of businesses in Ukraine have been affected by the war. Thus, it is inevitable that after the situation in Ukraine stabilises, many businesses will require debt restructuring and financial support.

In these extremely complicated conditions, the Ukrainian banking system has continued to work in all territories controlled by Ukraine, and supports Ukrainian business. At the same time, in order to prevent the uncontrolled leak of foreign currency from Ukraine and ensure the stable operation of the Ukrainian banking system, the National Bank of Ukraine (NBU) has implemented special rules for the operation of the banking system within the martial law period.

Namely, the NBU has imposed a ban for purchase of foreign currency and payments abroad, except for:

  • settlements with international financial institutions (the European Bank for Reconstruction and Development (EBRD), the International Finance Corporation (IFC), and the European Investment Bank (EIB), etc) and the purchase of foreign currency for such settlements;
  • payments for import of goods of critical import, as listed in the Decree of the Cabinet of Ministers of Ukraine ‘On the List of Critical Import Goods’ No 153 dated 24 February 2022; and
  • operations based on separate permits (decisions) of the NBU.

Without any prejudice to said measures, which, in my view, are reasonable and efficient, it should be mentioned that they directly affect foreign creditors whose debtors are residents of Ukraine. For example, if a loan provided to a Ukrainian borrower by a foreign lender becomes due for repayment now, the borrower will not be able to repay it due to said restrictions even if it has sufficient funds for this.

I have no doubts that under the vast majority of loan agreements, the current situation in Ukraine and restrictions implemented by the NBU may be considered as an event of default which leads to loans becoming immediately due for repayment. However, repayment is not possible as of now, both from a legal and a practical point of view. The only solution for foreign creditors could be enforcement of guarantees and sureties issued by companies outside of Ukraine to secure loans provided to Ukrainian borrowers.

At the same time, the conflict and its results constitute force majeure circumstances, which has been confirmed by the letter of the Ukrainian Chamber of Commerce and Industry (CCI) dated 28 February 2022, in which the CCI stated that it:

‘confirms that these circumstances from February 24, 2022 until their official ending, are extraordinary, unavoidable and objective circumstances for business entities and / or individuals under the contract, separate tax and / or other obligations the fulfilment of which occurred in accordance with the terms of the contract, agreement, legislative or other regulations and the fulfilment of which became impossible in the set deadline due to the occurrence of such force majeure circumstances (force majeure)’.

It is clear that the consequences of the force majeure will be considered based on the provisions of each separate loan agreement and applicable legislation. But, in any event, Ukrainian borrowers and their foreign guarantors and sureties will have some argument in support of postponing payment obligations under loan agreements and respective guarantees/sureties and avoiding sanctions for undue (re)payment.

Another particularly important task for the NBU and commercial banks is supporting the population both in Ukraine and abroad. Within the first days of the war, it was extremely important that turmoil in the banking sector was prevented, and that the sector's proper operation, namely the return of deposits to clients, the performance of payments, loading automated teller machines (ATMs) and banks’ branches with cash, and so on, was ensured. The banks have coped well and ensured the continuous work of all units on controlled territories.

Moreover, the NBU in cooperation with the National Bank of Poland and some commercial banks have started a programme in support of Ukrainians forced to leave Ukraine due to the war. It is reported that around 3.5m people left Ukraine within the first three weeks of March and most have either stayed in Poland or passed through Poland to other countries. Most Ukrainians who left had an extremely limited amount of cash in EUR or USD and most of their funds were in Ukrainian hryvnya (‘UAH’). As UAH is not a freely convertible currency, Ukrainians have experienced significant difficulties with the exchange of UAH into other foreign currencies and the exchange rate has sometimes been extremely unfavourable for Ukrainians. To eliminate this problem the NBU has agreed with the National Bank of Poland that it will repurchase up to UAH 10bn obtained by Polish banks from Ukrainians. This allows the establishment of a reasonable and predictable exchange rate in Poland and ensures the opportunity for Ukrainians to exchange UAH for Polish zloty and other currencies.

Last, but not least, the NBU has ordered the blocking of funds on the bank accounts of legal entities and individuals registered or permanently residing in the Russian Federation or the Republic of Belarus. Meanwhile, residents of the Russian Federation/Republic of Belarus, as well as legal entities whose ultimate beneficiary owner is a resident of the aforementioned states, are prohibited from conducting debit transactions on their bank accounts, except for:

  • transfers to the NBU’s special account to support the Armed Forces of Ukraine or state authorities of Ukraine; and
  • social payments, payments of salary, utilities, taxes, fees, and so on.

It is expected that such funds may be expropriated by Ukraine, including for the recovery of the Ukrainian economy.



* Oleksander Plotnikov is a partner and Head of Banking & Finance at Arzinger Law Firm in Kyiv.