The Russian aggression against Ukraine has reshaped the landscape of cross-border finance in the country. While the initial shockwaves of the conflict saw financing dry up almost entirely, with most support directed toward the government, a gradual but significant shift has occurred.
In the immediate aftermath of the invasion, all lending to Ukraine understandably stalled, with only emergency funding provided to the Ukrainian government, which was responsible for keeping the country’s financial system from collapsing. On its part, the National Bank of Ukraine (NBU) used its currency control mandate to impose an almost complete ban on making cross-border payments from Ukraine. Nearly three years after the full-scale invasion, the financing situation is far from what it was pre-2022, but participants and regulations have adapted.
The Shift in Funding Sources
As is often the case under similar circumstances, while private lending froze, support continued to flow from international financial institutions (IFIs) like the EBRD and IFC. Since 2022, the EBRD has deployed over EUR 4.5 billion in Ukraine and intends to continue supporting the country in different sectors and industries. The IFC has invested USD 1.6 billion in Ukraine, more than double the average annual financing provided before the invasion.
In addition to IFIs, foreign governments have been providing substantial support to Ukraine in many forms at a government-to-government level. Many foreign governments have also designated private-sector programs for Ukrainian businesses. These are usually implemented through export credit agencies or national development banks. The projects cover different products, ranging from portfolio guarantees for banks, smaller and medium-sized trade finance, and large project finance.
Faced with unprecedented challenges, private lenders have primarily focused on managing their existing investments in Ukraine. This has often involved restructuring debt and deferring payments rather than taking on new risks. In some cases, private lenders have participated in new financing under the protective umbrella of governmental agencies or ECAs, mitigating their exposure to the volatile environment.
Regulatory Adaptation
Recognizing the need to stimulate investment and facilitate reconstruction, the NBU has adopted a pragmatic approach to regulating cross-border finance. A key element of this approach has been to provide greater flexibility for projects backed by highly reputable institutional lenders, including IFIs. In these cases, borrowers are granted considerable freedom to service and repay their debt, a move designed to incentivize further investment from these crucial sources.
This regulatory flexibility stands in contrast to the more restrictive environment faced by private lenders. While they are permitted to receive interest payments on pre-existing debt that was not in default as of February 2022 (with additional conditions attached), principal repayments remain restricted. To encourage private lending, the NBU has introduced a specific regime for “new money” private lending, where funding has been provided since June 2023. Only funds lent from outside of Ukraine would be eligible (i.e., a foreign lender using funds held in Ukraine to provide a loan would not be able to take the benefit of getting repaid to a foreign account). For these projects, both servicing and repayment are allowed. Still, limitations on early repayment are in place, meaning that once parties agree on a repayment date or repayment schedule, the borrower will be forced to stick to it. Finally, the NBU has reintroduced a requirement that was abolished many years ago – a so-called “maximum interest rate,” a cap on interest, fees, and all servicing payments other than the principal repayment. This rate is currently set at 12% per annum, adding another layer of complexity for private lenders to consider.
The Outlook for Cross-Border Finance
The future of cross-border finance in Ukraine remains closely tied to the trajectory of the war and the ongoing and future recovery efforts. In the immediate future, the present categories of lenders are expected to continue playing a key role in providing new financing due to the security situation. At the same time, beyond the immediate security concerns, a persistent challenge to attracting finance from any source is the availability of bankable projects with sound legal structures and viable business models. Ultimately, to ensure Ukraine’s long-term economic recovery, businesses, the government, and regulators must collaborate to establish a transparent and adequate regulatory framework, develop attractive projects, and leverage cross-border finance for the nation’s reconstruction and recovery.
By Anton Korobeynikov, Partner, Sayenko Kharenko
This article was originally published in Issue 11.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
