Category: Ukraine

The National Bank of Ukraine (“NBU”) has made a further step towards liberalising the currency regime for ECA supported lending. These amendments became effective on 30 November 2016.

Pursuant to them Ukrainian borrowers and their authorised banks can repay fees and commission to foreign lenders in amounts exceeding the NBU’s mandatory threshold calculated on the basis of the statutory interest rate cap, provided that: (i) such payments are purported to indemnify the lenders’ cost payable to the ECA for its services and (ii) the ECA is recognised on the official website of the OECD. Such payments should be excluded from the calculation of a mandatory interest rate cap which makes Ukrainian borrowers more competitive in the ECA financing space. 

The NBU is keeping up the pace of liberalising the tough currency regime implemented earlier across the FX market as part of a stabilisation plan. It is worth highlighting other amendments which the NBU recently introduced on 23 November 2016.

Key points from recent NBU amendments include:

Ukrainian banks are entitled to use currency futures, options, other exchange-trade derivatives in respect of the currency and FX rate. This enables banks to lock-in the currency or FX rate and hedge against the risk of the adverse movement of the FX element of a transaction. Banks are able to elaborate suitable hedging strategy for their portfolios, which should adjust tension on the domestic FX market;

a deadline for closing out the aggregate long opened position of banks (Л13-1) was extended until 1 January 2019, whereas earlier Ukrainian banks had to close out it within a year. Therefore, banks  have received additional time for complying with the limit for long opened position by restructuring their loans denominated in a foreign currency;

Ukrainian banks may trade with non-residents and invest in investment grade securities issued by IFOs and sovereign issuers of G7 countries, rated by at least two reputable rating agencies (S&P, Moody’s or Fitch) with a minimum corporate rating (AA- or Aa3). The securities are to be denominated in USD, EUR, JPY, GBP, CAD and the redemption date should not be longer than five years from the trade date. Accordingly, if the features of securities meet the abovementioned eligibility requirements, no NBU individual licence is required for such deal; 

banks which are a member of international payment systems (VISA, MasterCard) may purchase foreign currency in excess of USD 50,000 per calendar month to make a guarantee deposit, which will be placed abroad according to rules of international payment systems.

By Oleksandr Kurdydyk, Partner, and Dmytro Pshenychniuk, Senior Associate, DLA Piper

Corruption and other illegal practices have always been a major concern for international corporations doing business in Ukraine.

Such corporations often initiate comprehensive internal investigations to confirm compliance by key personnel and the company as a whole with anticorruption requirements, including the Foreign Corrupt Practices Act (FCPA), trade regulations and restrictions, and relevant internal regulations. A common problem during such investigations is maintaining the right balance between the scope of the information which needs to be reviewed and the privacy of the employee.

In Ukraine an employer must receive prior written consent from the employee to process any of that employee’s personal data. Under normal circumstances, this does not create any problems, since employees usually provide a broad consent to process their personal data for the employment purposes on the first day of employment. 

The situation is different with internal investigations. Lawyers and employees within a company’s compliance department usually require a very broad scope of information, including corporate and personal email correspondence and correspondence performed via electronic devices, along with various documents, notes, and contracts. In some cases, moreover, this information must be transferred to third parties, such as the compliance department of the parent company, external consultants, or state authorities. The consent which employees provide on their first day of employment rarely covers processing such a broad scope of information for such a specific purpose. Therefore, the employer has to obtain a new, broader consent from the employee when an investigation is pending, which can be quite difficult – or downright impossible – if the employee has something to hide. 

To avoid this situation, we recommend asking each key employee to sign a very broad consent to process his or her personal data as early as possible, well before an internal investigation is even on the agenda – preferably on the first day of employment. This consent must expressly allow the employer to process corporate and private correspondence, correspondence through corporate devices, and any documents, notes, files, archives, and operations of the employee, to store such information, and to transfer it abroad. Such consent should also indicate that the employee’s personal information may be processed by the employer, its affiliates, external consultants, and state authorities for the purpose of internal or external investigations.

It is very important to remember that in Ukraine the analysis of correspondence requires the consent of all parties to the correspondence. In practice, it is almost impossible to obtain all necessary consents. To mitigate possible risks, we recommend that the analysis be structured in a way that will keep the number of potential violations to a minimum. One way to do that is to cypher the personal details of the correspondence, starting with replacing the name of each party to the correspondence with a specific code prior to analyzing it, which will allow the analysis to be made without violating the privacy of the parties. After the analysis is completed and the employer has determined the scope of the correspondence which may be relevant to the investigation, the employer may then request the names of the parties to the correspondence and their consent to analyze it.

Another common problem during internal investigations is that Ukrainian law prohibits the transfer of personal data to countries which do not provide a sufficient level of personal data protection. The USA is one such country. Therefore, the transfer of personal data of Ukrainian citizens to the USA is, formally, prohibited. At the same time, state authorities, working in cooperation with the American Chamber of Commerce in Ukraine, have reached an agreement to work around this restriction. To transfer an employee’s personal data from Ukraine to the USA, a Ukrainian company must enter into a personal-data transfer agreement with the US company. Such agreement provides for a broad set of undertakings on the part of the US company to ensure the safety of the personal data to be transferred. Having such an agreement does not entirely remove the risks which can arise from the transfer of personal data from Ukraine to the USA, but it definitely mitigates them.

Currently, internal investigations in Ukraine are associated with many difficulties and require careful structuring to avoid exposure to administrative, civil, or criminal liability. At the same time, the most recent draft of the new labor code permits an employer to use technical means to control compliance of employees with their labor duties, subject only to the prior notification of the employees. If passed, it will be a substantial improvement for employers who wish to conduct internal investigations in Ukraine.

By Mykola Stetsenko, Managing Partner, and Yuriy Zaremba, Associate, Avellum

This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The Ukrainian legal framework governing international arbitration generally follows the international standards set by UNCITRAL.

Ukrainian law explicitly prohibits review of arbitral awards on the merits. Also, such essential provisions as grounds for setting aside and for refusing recognition and enforcement of an arbitral award replicate the UNCITRAL Model Law and the New York Convention, respectively. That said, Ukraine has not implemented the 2006 amendments to the UNCITRAL Model Law designed, among other things, to improve the regulation of interim measures in arbitration. Furthermore, there are certain distinctions in Ukrainian arbitration-related legislation that favor international arbitration – or that may have the opposite effect. 

One of the principal pro-arbitration features of Ukrainian law is that it extends the application of the international arbitral dispute-resolution mechanism to the parties incorporated and having places of business within Ukraine, provided that at least one of the parties qualifies as an entity with foreign investments. Such a provision appears to give a valuable tool to foreign investors setting up business in Ukraine to opt out of the jurisdiction of Ukrainian courts – which is often a preference. 

It is worth noting, though, that Ukrainian arbitration law places considerable emphasis on the written form of the arbitration agreement. In this respect, Ukrainian arbitration law does not reflect the 2006 revisions to the UNCITRAL Model Law that permit an arbitration agreement to be concluded orally, provided that the parties’ consent to arbitration is recorded in any form.

Moreover, Ukrainian law qualifies a rather broad range of disputes as non-arbitrable. Notably, disputes relating to challenge of acts (whether of regulatory nature or not), disputes arising out of state procurement contracts, and corporate disputes fall under the category of disputes not capable of settlement by arbitration. The Ukrainian law position with respect to the list of non-arbitrable disputes has been a subject of ongoing debate. There are proposals to narrow down this list and carve out corporate disputes or, to the contrary, to declare disputes related to transactions with securities or equity interests in a Ukrainian entity and a number of other matters as non-arbitrable.

Recent and Prospective Legislative Developments 

The Ukrainian parliament has recently passed two laws that will take effect in October 2016 related to the enforcement procedure. The new laws introduce the concept of private bailiffs to the Ukrainian legal system. That is expected to increase the efficiency of the enforcement procedure. While the laws target enforcement proceedings generally, the anticipated positive effect will also extend to arbitral awards that have been recognized and allowed for enforcement by a Ukrainian court. 

Furthermore, a bill concerning judicial supervision and support for arbitration is currently pending before the Ukrainian parliament. If enacted into law, the bill would introduce long-awaited changes to the Ukrainian arbitration-related legal framework. The bill limits the judicial proceedings on challenge, as well as on recognition and enforcement of arbitral awards, to two court instances (currently, up to four court instances may be involved in such proceedings, with a possibility of a higher court sending the case for repeat review by a lower court). Further, the bill proposes to empower Ukrainian courts to issue orders on provisional measures in support of arbitration and to enable parties to seek court assistance in obtaining evidence for the purposes of arbitration.

Recent Developments in Enforcement of Arbitral Awards 

One of the most notable recent cases is the enforcement of an emergency arbitrator award rendered against the State of Ukraine in favor of JKX Oil in an Energy Charter Treaty arbitration under the emergency arbitrator procedure contemplated by the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce. A Ukrainian first-instance court initially ruled that the award be recognized and enforced, rejecting all government objections. Notably, the court dismissed the argument that the award was rendered beyond the scope of the submission to arbitration – observing, in this regard, that the emergency procedure was provided for under the applicable arbitration rules. This decision was later reversed by the appellate court, based on the public policy objection because the award concerned hydrocarbon exploration royalties. Although overruled on appeal and still awaiting a final court decision, this case offers useful guidance on enforcement of a somewhat unconventional arbitral award for the Ukrainian legal system and generally demonstrates the trend of pro-arbitration decision-making by Ukrainian courts. 

By Svitlana Chepurna, Partner, and Anna Vlasyuk, Associate, Asters

This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

The public-private partnership (PPP) model is used worldwide for infrastructure development and social welfare projects. In 2016, the Ministry of Economic Development and Trade of Ukraine allocated 312 state-owned assets for PPP projects.

The focus of these projects was healthcare, transport infrastructure, energy, mechanical engineering, and agribusiness. Now the question is whether Ukrainian PPP projects are promising enough in the eyes of private investors. Today the Ukrainian healthcare market is estimated at USD 4.9 billion. However, state-owned and municipal clinics in Ukraine that provide 90% of services fail to satisfy the market’s demand in both the scope and quality of healthcare services needed by the patients. 

Despite the fact that the On Public-Private Partnership Act was adopted in Ukraine as early as 2010, a World Bank’s report mentions only two implemented projects under this law. There are two main reasons for this delay. The first one is that the project launch procedure is complicated, expensive, and requires a mandatory assessment of project efficiency and risks at the investor’s expense – but provides no guarantees that the investor carrying out that assessment will eventually be awarded the contract (due to the competitive selection of investors). The second reason is that the state does not provide any long term (i.e., over one year) financial guarantees due to budget legislation. As a result, PPP transactions are usually based on the legislation defining the legal regime of specific contracts (e.g., concession, joint venture, management, lease, etc.), and not under the Act On Public-Private Partnership.

In 2016, the Ukrainian Parliament attempted to rectify the situation. In May an amendment to the On Public-Private Partnership Act came into force and expanded the scope of guarantees for investors. For instance, investors now have the right to suspend the fulfillment of their obligations if the prices for their products, which are regulated by the state, are economically unjustified. Another improvement is the newly introduced right to settle disputes via international arbitration. The Parliament is also considering changes to budget laws that would allow the state to provide long term financial guarantees in PPP projects.

So what forms do PPP projects take in Ukraine, and why?

The most commonly-used forms of PPP projects are: (1) concession and (2) lease of state-owned and municipal property. Currently, large infrastructure and industrial structures such as plants, ports, and roads may be among the objects of concession. Concession is one of the few forms of PPP (along with financial lease) which allows private investors to eventually obtain priority right to buy-out of the state-owned property.

Lease remains the most regulated and safe option for investors. An investor may lease the whole property or some part of it (i.e., a building or its section), and may also renovate or introduce technical modernization or other improvements to the leased property at its own expense and be compensated for it. In some instances, following these improvements, the investor may become an owner of this property. The law does not state the maximum period of lease, but usually the assets are leased for at least 10 years.

A joint venture agreement involves the combination of the assets and/or organizational resources (stake) of the public and private sector parties to carry out a joint project. In Ukraine, the state’s stake in a joint venture can be no lower than 50%, which cannot be overruled by contract. The maximum lifespan of a joint venture is not legally defined and is up to the partners to determine.

So far, management contracts have been seldom used in PPP, which is partly due to their novelty in the Ukrainian business environment. At the same time, this is the most flexible form, since the law does not yet dictate any mandatory provisions. Acquisition of management services by the state will be carried out through the mechanism of public procurements, including e-system “ProZorro.” The law does not limit the duration of management contracts, though the default term is five years. The amended version of the On Public-Private Partnership Act mentions management contracts alongside concessions and joint ventures, so we can expect it to be used more often. 

Ukraine carries significant potential for PPP projects. And while in the past legislation did not provide solid procedures and guarantees for private partners, the situation now is rapidly changing.

By Tetyana Gavrysh, Managing Partner, Inyurpolis Law Firm

This Article was originally published in Issue 3.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.