Local Ukraine Government bonds have become one of the most profitable and stable financial instruments in the Ukrainian market recently. Not only have local investors been actively investing in these bonds, but many foreigners have also found them attractive considering the high interest rates on offer, backed by a sovereign guarantee of Ukraine.
By way of illustration, the Ministry of Finance of Ukraine sold UAH 12.6bn worth of war bonds (including short-term three-month bonds worth UAH 546m at 9.5% per annum, six-month bonds worth UAH 8.7bn at 10% per annum, and 18-month bonds worth UAH 90m at 11.5% per annum) at its latest regular auction on 24 May 2022.
Since the beginning of the unprovoked and actively ongoing barbaric military aggression by the Russian Federation, the National Bank of Ukraine (the NBU) has been forced to impose several temporary restrictions, including on cross-border currency payments, with the aim of ensuring the steady functioning of the country’s financial system during martial law. In fact, the restriction on cross-border payments has temporarily limited the ability of foreign investors, which made their investments and profits in the UAH local currency, to fully transfer coupon payments and redemptions of the bonds from Ukrainian bank accounts abroad.
Foreign investors in governmental bonds are currently unable to convert UAH funds in Ukrainian accounts into foreign currencies and transfer those funds abroad, subject to the carve outs described below. Ukrainian banks do not currently allow wire purchases of foreign currencies from UAH bank accounts. To transfer funds abroad, individuals first need to withdraw cash from UAH accounts, use it to purchase cash in a foreign currency, put this purchased foreign currency in their foreign currency Ukrainian bank account and then transfer it abroad, up to a maximum of UAH 100,000 (approximately USD 3,000) per month. The sale of foreign currencies in cash by banks to their clients is done at the exchange rate sat by each bank individually, subject to the open currency position and actual availability of such foreign currency cash in each bank.
Some of the other options include purchases of foreign currency pursuant to swap contracts (although this option requires additional foreign currency injections) or pursuant to forward contracts executed before or on 23 February 2022, which could be the case with some corporate investors. Purchases and transfers of foreign currencies are also possible for a limited range of private needs, e.g. medical payments.
However, given the high interest in Ukrainian government securities and to further increase their attractiveness, the NBU has introduced a cut-off date for abovementioned purchase/transfer limitations. Foreign investors will be able to convert into a foreign currency and transfer abroad any income (both interest and redemption) paid on Ukrainian governmental bonds after 1 April 2023.
