Recent banking developments in light of Crimean conflict
Author: Andriy Pozhidayev, Anna Tkachova
Source: International Law Office. – 2014. – 1 August

Payment system and bank operations

On April 15 2014 Parliament adopted the Law on Securing the Rights and Freedoms of Citizens and the Legal Regime on the Temporarily Occupied Territory of Ukraine. This law manifests the official Ukrainian position that the Autonomous Republic of Crimea and the city of Sevastopol are considered an integral part of the Ukrainian territory. The Ukrainian Constitution and Ukrainian laws and regulations continue to apply to these territories.

On May 6 2014 the National Bank of Ukraine issued the Resolution on the Withdrawal and Revocation of Banking Licences and General Licences for Foreign Exchange Transactions of Certain Banks and Closure of Banks' Separate Units Located in the Autonomous Republic of Crimea and Sevastopol City (260/2014), which terminated correspondent relations between mainland Ukrainian banks and Ukrainian and foreign banks located in Crimea.

On May 12 2014 the Ministry of Justice issued a letter (6616-0-33-14/12.2) noting that any questions regarding payments under contracts with business partners in Crimea may be submitted to the National Bank of Ukraine. Pursuant to the Law on the National Bank of Ukraine, the National Bank of Ukraine regulates payment and settlement systems in Ukraine and determines the form of and procedure for payments between banks (among other parties).

Crimea Free Economic Zone

On June 19 2014 Parliament adopted on first reading the Law on Taxation and Customs Control in the Free Economic Zone of Crimea and on Peculiarities of Conducting Business on the Temporarily Occupied Territory of Ukraine (4032a), which establishes the Free Economic Zone in the territory of the Autonomous Republic of Crimea and Sevastopol (for further details please see "New legislative initiative establishes the Crimea Free Economic Zone"). The law includes several provisions affecting banking transactions.

Currency and payment regulations

The law imposes the following conditions on currency and payment regulations:

• A multi-currency regime has been established in which goods and services that are distributed or provided in the Free Economic Zone can be paid in Ukrainian hryvnia or other freely convertible currencies.

• Currencies of member countries of the Commonwealth of Independent States may be used in cash settlements.

• Bank transfers from the Free Economic Zone to mainland Ukraine and vice versa can be made only in hryvnia or other freely convertible currencies.

• During the temporary occupation, settlements between contractors from mainland Ukraine and parties in the occupied territory can be made only in freely convertible currencies.

• Ukrainian payment service providers cannot operate in the occupied territory.

• Legal entities in the Free Economic Zone are discharged from the requirement to convert foreign currency income into hryvnia.

• During the temporary occupation, parties may not:

• move cash roubles across the administrative border of the Free Economic Zone;

• exchange cash roubles for hryvnia and vice versa in the Free Economic Zone; or

• make deposits or provide loans in roubles in mainland Ukraine.

Banking operation restrictions

During the temporary occupation, banks and other financial institutions that are resident in Ukraine (ie, with a tax address in mainland Ukraine) may not undertake banking activities in mainland Ukraine if they:

• have sub-divisions, subsidiaries or affiliate banks which provide banking services in the occupied territory (except for services related to the 'evacuation' of business from the Free Economic Zone);

• are members of either a banking group established under Russian law or a banking group established under Ukrainian law which includes a member that is a Russian financial institution; or

• belong to a bank holding group (irrespective of the place of incorporation) that includes members which provide banking services in the occupied territory.

Property foreclosure as collateral for foreign currency loans

On June 3 2014 Parliament adopted the Law on the Moratorium on Foreclosure of Ukrainian Citizens' Property Provided as Collateral for Foreign Currency Loans. The law addresses the issue of indebtedness under foreign currency consumer loans provided to Ukrainian citizens by local credit institutions. The law prohibits banks from:

• foreclosing on immovable property that is pledged or mortgaged on the basis of a pledge/mortgage agreement which constitutes security under the loan in question, provided that:

• the immovable property is used as the debtor's or guarantor's residence and the debtor or guarantor has no other immovable property suitable for residency; and

• the total area of the property does not exceed 140 square metres for apartments or 250 square metres for private houses;

• recovering from the debtor any other property or proprietary rights if the proceeds obtained from the prior pledge or mortgage enforcement are deficient; and

• assigning (ie, selling or otherwise transferring) indebtedness under the foreign currency consumer loan to third parties.

This law does not apply in the Crimean territory.

The law may be annulled through the adoption of legislation regulating the conversion of foreign currency loans into local currency loans (and related issues).

Notably, in 2011 Parliament prohibited the extension of foreign currency loans to individuals.

Mortgage foreclosure in entrepreneurs' bankruptcy proceedings

Ukrainian court practice previously allowed for the termination of mortgage agreements as a consequence of the bankruptcy of entrepreneurs who provided the mortgage as collateral. Creditor claims under a secured loan agreement were not included in the list of acceptable creditor claims against entrepreneurs.

However, a recent Supreme Court decision (which is binding on all lower courts) has discontinued this practice. In accordance with the decision, mortgagee claims under loan and mortgage agreements should be considered as monetary claims. In addition, the mortgagee should be entitled to submit its claims to the debtor and creditor jointly or separately. The Bankruptcy Law does not limit the possibility of the mortgagee to claim debt from the mortgagor if the debtor under the main agreement failed to perform its obligations.

The mortgagee's claim will be treated as a secured monetary claim. Therefore, such claims will be included in the creditor's registry and will be satisfied as claims of first priority.

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