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  1. 1. Banking & Finance in Russia and Ukraine Newsletter 03/03, April 2003
  2. 2. Banking & Finance in Russia and Ukraine Banking & Finance in Russia and Ukraine Baker & McKenzie Newsletter April 2003 As reform in Russia’s financial sector gains momentum, Baker & McKenzie continues to publish this newsletter, which covers the major legal developments in this sector. Considering the dynamic growth of the financial market in Ukraine, we have expanded the substance of the newsletter to also highlight the developments in the Ukrainian banking & finance sector. This is our third issue. Table of Contents RUSSIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 A. RECENT LEGISLATIVE DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. Securities Market Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Form of Securities Secured Bonds Options ADRs Foreign Securities Financial Advisors Market Manipulation 2. Currency Regulation and Currency Control Law Amendments . . . . . . . . . . . . . . . . . . . . 5 3. Non-State Pension Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 4. Money Laundering Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 B. DRAFT LEGISLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 1. Draft Derivatives Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2. Securitization and the Draft Law On Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . 9 3. Draft of a New Federal Law On Currency Regulation and Currency Control . . . . . . . . . . 9 UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 1. Licensing of Cross-Border Payments for Shares of Ukrainian Issuers . . . . . . . . . . . . . . . . 11 2. NBU Permits Residents of Ukraine to Purchase Ukrainian Sovereign Eurobonds . . . . . . 11 3. New Currency Control Rules for Cross-Border Payments for Foreign Works/Services . . . 12 4. New Rules on Taxation of Foreign Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5. New Civil and Commercial Codes of Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6. Regulations on the State Commission on Regulation of the Financial Services Markets in Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 CONTACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
  3. 3. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine RUSSIA A. RECENT LEGISLATIVE DEVELOPMENTS 1. Securities Market Law In December 2002, the Federal Law On the Securities Market (the “Securities Law”) was amended, with most of the new provisions coming into effect on 30 December 2002. These amendments have introduced several significant changes to the existing framework of securities market regulation in Russia. Form of Securities The Securities Law generally permits the issuance of both registered and bearer type “issuable” securities (i.e., shares, bonds and options). As a result of the amendments, however, registered securities can now be issued only in non-documentary form absent an express provision to the contrary in another federal law. Previously-issued certificates of registered securities are now considered as merely extracts of the shareholder register. Bearer form securities, on the other hand, may only be issued in a documentary form. We believe that this change is useful to streamline the existing securities regime. Secured Bonds The amendments to the Securities Law now expressly authorize the issuance and circulation of secured bonds in Russia. These amendments, along with the Draft Law On Mortgage- Backed Securities (see Section B(2) below), represents an important step towards the development of an asset-backed financing market in Russia. While these bonds may be secured by pledges of securities and immovable property, sureties and guarantees issued by banks and certain governmental entities, it appears that at the moment they cannot be secured by other types of security instruments or other assets (e.g., equipment, goods, or intangible assets). Importantly, the amendments now address the mechanics of concluding a security or surety agreement with an unlimited number of bond investors whose identity may not be known at the outset. To remedy the problem of needing to conclude a security agreement with each investor, the amendments provide that an appropriate security agreement is deemed to be concluded upon the investor’s purchase of the bonds and the requirement of a written security agreement is deemed to have been satisfied. The terms and conditions of the security must be set out: (i) in the decision to issue the bonds; (ii) in the prospectus, if registration of the prospectus is required; (iii) on the actual bond certificate where the bonds are in documentary form. All issues relating to the provision of security for the bonds are governed by Russian law (even if the security is provided by a foreign party), with Russian courts having exclusive jurisdiction to resolve those issues. The amendments also address the procedure for transferring secured bonds, declaring a default under them and enforcing the security, as well as application of recovered proceeds. Nevertheless, issues relating to the enforcement of the security remain. Furthermore, the Russian Federal Commission on the Securities Market (the “FCSM”) does not appear to foresee that those issues will be regulated in the issuing documentation. Options The amendments also introduced the notion of an issuer’s option into Russian securities law. An issuer’s option is similar to a warrant in western capital markets. Under the Securities Law, an option is a registered “issuable” security fixing the right to buy, during a specified 3
  4. 4. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine period or upon the occurrence of specified conditions, a fixed number of the issuer’s shares at the fixed price. The issuer may issue options only after its charter capital has been paid-up in full. An option may not entitle its holder to acquire: (i) more shares than the total amount of the authorized shares; or (ii) more than 5% of each class of the issuer’s shares outstanding at the time of registration of the options issue. The procedure for the placement of options is the same as for the placement of securities convertible into shares. The placement of the shares underlying the option must be at the price set forth in the option. ADRs The amendments also set forth the general procedure for obtaining FCSM authorization to establish an ADR program, enabling the circulation of Russian securities in foreign capital markets. The conditions for obtaining authorization are: (i) state registration of the Russian securities underlying the ADRs; (ii) the listing of the underlying securities on at least one Russian stock exchange or other trading organizer; (iii) the amount of Russian securities to be included in the ADR program does not exceed a certain ratio established by the FCSM; (iv) the voting rights for the underlying securities are exercisable only at the express instruction of the ADR holders; and (v) compliance with other conditions set forth in Russian federal laws. FCSM is obligated to issue a decision on an application to establish an ADR program within 30 days from the date of submission of all the necessary documents, with the right to request additional documents and information and verify them during an extension of up to 30 days. Foreign Securities The amended Securities Law now also sets forth the general procedure for placing and circulating foreign securities in Russia. Securities of foreign issuers may be placed and publicly circulated in Russia subject to existence of an appropriate treaty between Russia and the foreign issuer’s jurisdiction. This restriction, however, does not apply to International Financial Institutions (IFIs). The Russian Government has yet to approve the list of IFIs which will be permitted to publicly place securities in Russia without any special authorization, although those securities will still need to undergo state registration with the FCSM. The recording of rights to foreign securities offered in Russia must be done through depositories holding a valid FCSM license. The documentation to be presented by a foreign issuer for state securities registration will be the subject of special FCSM regulations not yet issued. Financial Advisors The amendments also introduced regulation of securities market financial advisors. Under the new law, a financial advisor is a legal entity, unaffiliated with the issuer, which assists in the preparation of a securities offering circular (prospectus). A financial advisor must hold a valid broker/dealer license. As of 1 April 2003, for the public placement or circulation of securities in Russia, the prospectus must be signed by the financial advisor, who thereby certifies the accuracy and completeness of the information presented, excluding information certified by the auditor or the appraiser. The financial advisor together with any other party signing the prospectus have secondary joint and several liability for damages suffered by investors as a result of 4
  5. 5. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine inaccurate, incomplete or misleading information in the prospectus, except the issuer whose liability remains primary. Market Manipulation The amendments also bring to the Russian securities law a definition of price manipulation. Price manipulation is defined as an activity which creates an illusion of rising or falling of prices or trading activity vis-‡-vis the actual price or trading activity level for the purpose of inducing investors to buy or sell publicly placed or circulated securities. Price manipulation includes, among other things: (i) dissemination of false or misleading information; (ii) performing securities transactions on stock exchanges which do not result in a change in the securities’ ownership; (iii) the simultaneous issuance of instructions to buy and sell securities at prices considerably different from the current market prices for analogous transactions; and (iv) agreement between two or more market participants or their representatives to buy or sell securities at prices considerably different from the current market prices for analogous transactions. Stock exchanges are required to adopt measures to prevent price manipulation. If evidence of price manipulation is discovered, the FCSM will conduct an investigation in accordance with the procedure set forth in the Regulation On the Procedure of Investigating the Activities of Individuals that are Characteristic of Price Manipulation on the Securities Market (approved by FCSM Resolution dated 7 February 2003). If this investigation confirms that price manipulation has occurred, the penalties may include fines as well as suspension or cancellation of FCSM licenses. 2. Currency Regulation and Currency Control Law Amendments In December 2002 and February 2003, two federal laws amending Articles 5, 6 and 8 of the Federal Law On Currency Regulation and Currency Control (the “Currency Law”) were enacted. The amendment to Article 5, effective 31 December 2002, relates to crediting export proceeds to foreign bank accounts. Article 5 now expressly provides that residents may deposit in foreign banks the proceeds from the export of goods, works, services and results of intellectual activity in the amount necessary to perform their obligations under loan agreements concluded with non-residents acting on behalf of OECD governments. Once deposited, such export proceeds may only be used to discharge obligations under that loan agreement. Although Russian Central Bank permission will still be necessary, once granted, the export proceeds will no longer be subject to mandatory conversion into rubles. This will remove the currency conversion risk that structures like “Lucille” are trying to address and, as a consequence, will allow Russian borrowers to obtain less expensive funds. The amendments to Articles 6 and 8 of the Currency Law changed the procedure for individuals exporting currency valuables and foreign cash. From 14 March 2003, both resident and non-resident individuals are now subject to the same restrictions for exporting currency valuables and foreign cash. Currency valuables (excluding foreign cash) that were previously imported or transferred into Russia may be exported or transferred within the amount indicated in the customs declaration or other document confirming proper importation. Up to USD 10,000 in foreign currency can now be exported without any special authorization plus an amount of foreign currency equal to that previously imported into Russia as indicated in a customs declaration. An individual must declare sums over USD 3,000 in an export customs declaration; sums below USD 3,000 are not subject to mandatory declaration. 5
  6. 6. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine 3. Non-State Pension Funds The amendments to the Federal Law On Non-State Pension Funds (the “NSPF Law”) which came into effect on 13 January 2003 introduced significant changes into the authorized activities, functions and licensing of non-state pension funds, reconciling this law with other pension-related legislation, i.e., the Law On the Investment of Retirement Pension Accumulations. A non-state pension fund (“NSPF”) is defined as a special organization in the form of non- commercial entity providing social security. In addition to managing private pension funds, an NSPF may now provide obligatory pension insurance, which was previously only a governmental function, and as well as occupational pension insurance. An NSPF is responsible for collecting pension contributions, investing pension reserves, maintaining appropriate records of its pension obligations, and making payments to fund members. An NSPF engaged in providing permitted insurance services is responsible for collecting pension savings, investing and accounting for those savings, and making payment to the insured individuals. The amendments establish requirements for obtaining an NSPF license where none previously existed. In order to obtain and retain a license, an NSPF must have charter capital of not less than 3 million rubles. This amount will increase to 30 million rubles on 1 January 2005, and again to 50 million rubles on 1 July 2009. Additionally, the amendments impose minimum qualifications on a NSPF’s chief executive and chief accountant. An NSPF license issued before 1 January 2003 will expire on 1 July 2009. Currently, an NSPF may provide obligatory pension insurance if it has: • Not less than two year’s experience with non-state pension funds; • Simultaneously serviced not less than 5,000 pension accounts for at least one year (increasing to a minimum of 20,000 accounts on 1 July 2009); • Charter capital of at least 30 million rubles; • No actuarial deficit for at least two years; and • Not had its license suspended during the previous two years. The amended law now imposes specific requirements on the pension contract itself and sets forth procedures for concluding, amending and terminating it. The law leaves the responsibility for preparing a standard form of obligatory pension insurance contract incorporating the law’s mandatory provisions to the Russian Government. The law also regulates the transfer of pension fund assets from one NSPF to another or to the federal Pension Fund as well as the transfer of pension accounts. For an NSPF which provides obligatory pension insurance, the amendments impose specific restrictions as to the structure of its investment portfolio: • The securities of an issuer or a group of related issuers may not exceed 5% of the investment portfolio, with the exception of Russian state securities; • Deposits with credit organizations in the same banking group may not exceed 10% of the investment portfolio; 6
  7. 7. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine • • Securities issued by entities affiliated with an NSPF, its management company, specialized depository or actuary may not exceed 5% of the investment portfolio; Shares of a single issuer may not exceed 10% of that issuer’s capitalization; • Notes of a single issuer may not exceed 10% of the cumulative amount of circulated notes of that issuer, with the exception of Russian state securities; • The securities of a single issuer shall not exceed 15% of the capitalization of that issuer, with the exception of Russian state securities, and may not exceed 15% of the securities issued by a constituent member of the Russian Federation; • Ruble and foreign currency assets may not exceed 20% of the investment portfolio; and • Foreign securities may not exceed 20% of the investment portfolio. The Russian government may also impose other limits on permitted investments. As we reported in the previous issue of this newsletter, in accordance with the law On the Investment of Retirement Pension Accumulations, the Russian Pension Fund is empowered to invest pension contributions through a duly-licensed management company. Furthermore, this management company may be a state-owned company. In a resolution dated 22 January 2003, the Russian government designated Vneshekonombank as the state management company for the trust management of pension accumulations for insureds who have not specifically selected a particular investment portfolio or company. 4. Money Laundering Legislation For the past two years, Russia has been building a legal framework for combating money laundering and the financing of terrorism. The primary law in this area is the aptly titled Federal Law On Countering the Legalization of Revenues Obtained through Criminal Activity (Money Laundering) and Financing Terrorism, dated 7 August 2001 (the “Money Laundering Law”). Under Article 7 of this law, each bank or other organization performing an operation with money and other valuables is obliged to: (i) identify its customer; (ii) collect and retain information on each transaction including the recipient (precluding Swiss- style numbered accounts in Russian banks); and (iii) upon governmental request or on its own initiative if it has reason to believe that a transaction is likely to involve money laundering or terrorism financing, present all transaction documentation to the appropriate governmental agency. Disclosure to the authorized is not a breach of any duty of confidentiality. Earlier this year, the Russian Central Bank (the “CBR”) adopted several regulations in furtherance of the Money Laundering Law. CBR Regulation ‹ 207-P, effective 20 January 2003, sets forth the procedure for credit organizations to disclose information on suspicious transactions. Additionally, CBR Instruction ‹ 177-T, dated 24 December 2002, establishes CBR’s procedure for conducting regular inspections of credit organizations and their branches to confirm compliance with money laundering legislation. 7
  8. 8. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine B. 1. DRAFT LEGISLATION Draft Derivatives Legislation The mid-March Russian Duma derivatives workshop with ISDA and major market players demonstrated not only the need for comprehensive Russian derivatives regulation to provide greater certainty but also Russian regulators’ commitment to this goal. Two alternative approaches to regulating the derivatives market have been proposed. Under the first approach, existing laws such as the Civil Code and laws on banking and insolvency would be amended to provide legal certainty in enforceability of derivative contracts and permit close-out netting in insolvency. The second approach proposes the adoption of a comprehensive specialized law on derivatives which would take a broader approach to regulating the derivatives market in general. The Duma is now considering several draft laws underlying these two approaches, including: Amendment of the Civil Code It has been proposed to amend Article 1062 of the Russian Civil Code by adding an additional paragraph to provide that derivative contracts are not gambling and should be enforceable on general terms. This amendment would exclude the application of the “by way of business”, “for hedging purposes” or similar tests in establishing whether a particular derivative transaction should be judicially enforced. Law On Banks and Banking Activity The proposed amendments to the Federal Law On Banks and Banking Activity would expressly include derivative transactions in the list of banking operations and other transactions in which a credit institution may engage. The definition of derivative transactions would include forwards, futures and options, under which the value of the obligation depends on price fluctuations of foreign currency, securities, precious metals and stones, other property and property rights, interest rates, credit resources, indices (underlying assets) or on specific information as well as repos. The CBR and associations of credit institutions would be entitled to establish rules for concluding derivative transactions and adopt model contracts for different types of derivative transactions in accordance with international standards and practice. Special attention would be paid to the protection of interests of the clients of credit institutions when entering into derivative transactions. A credit institution that enters into a derivative transaction on its customer’s account would be required to inform the customer in writing, prior to the conclusion of the contract, of the risk of loss associated with the derivative transaction. The amendments would specify the substance of and the procedure for disclosure. Draft Law On Derivatives On 19 March 2003, a group of deputies under the auspices of the Duma Committee on Property submitted a draft law, On Derivatives (the “Draft Derivatives Law”), to the Duma for consideration. The Draft Derivatives Law is an attempt to create a complex and detailed regulation of the derivatives market in a single legislative act. It includes provisions on the definition of derivatives, their types, form and principal conditions for contracts, regulation of the derivatives market and the regulators, disclosure of information, protection of clients, performing activity on the derivatives market and the liability for the breach of the provisions of the Draft Derivatives Law, etc. 8
  9. 9. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine Unfortunately, neither approach has yet properly addressed the issue of enforceability of close-out netting arrangements in insolvency. While some draft laws on netting are being considered, it is clear that the derivatives market in Russia will not see any substantial growth without adequately addressing the issue of close-out netting. In the meantime, some techniques are being developed in an effort to implement close-out netting arrangements within the existing legal environment. Finally, although the Draft Derivatives Law has already been criticized, it still remains to be seen which of the two approaches will ultimately be favored. 2. Securitization and the Draft Law On Mortgage-Backed Securities Securitization is an area which is getting increased attention from both market participants and regulators. At the end of 2002, the Duma Banking Committee created a special group to examine the legislative basis for securitization. Further, a special working group of the Presidium of the State Council has also taken up securitization. A major two-day seminar on securitization in Russia and Kazakhstan will take place in early July in Moscow with the participation of regulators, professional advisors and market players. The current Russian regulatory environment permits only a limited number of assets and structures that can be used to achieve a “true sale” securitization. It is clear that the development of the securitization market in Russia will require a more comprehensive regulatory framework. The legislative work on the draft law On Mortgage-Backed Securities (the “Draft MBS Law”) is an important step towards the creation of an asset- backed financing market in Russia. The work on this draft law is still in progress (see the previous issue of this Newsletter for more details on the draft law). On 17 March 2003, the Duma Committee on Credit Organizations and Financial Markets recommended that the Draft MBS Law be forwarded for second reading. Notwithstanding the fact that the Draft MBS Law will be undergoing second reading shortly, one of the main questions still remains to be resolved – that is, do banks have the right to directly participate in the issue of mortgage-backed securities or may this only be done by specialized mortgage agencies. In its present form, the draft allows banks to issue mortgage-backed securities subject to certain capital and other requirements to be established by the CBR. One such requirement is that a bank issuing mortgage-backed securities have at least 60% of its assets in mortgage loans. 3. Draft of a New Federal Law On Currency Regulation and Currency Control On 14 March 2003, the governmental draft of the federal law On Currency Regulation and Currency Control passed first reading in the Russian Duma, defeating two competing versions. It is expected that prior to the second reading, the draft will undergo significant changes. Assuming that the legislative work will proceed as initially planned, a version of the draft law is expected to enter into force in early 2004. If adopted, the draft law is expected to be a transitional law to a subsequent lifting of the exchange control regulations in Russia in 2007. Generally, the draft law is superior to the current law in both form and substance. The scope of the CBR’s “regulation-forming” authority has been narrowed and the administrative barriers to currency transactions have been reduced. Responsibility for currency regulation would be shared between the Russian Government and the CBR. 9
  10. 10. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine Some of the proposed changes, however, have already drawn criticism as representing a step back from liberalization of the currency control regulations in Russia. These changes include: (i) determining residency of Russian individuals for currency control purposes by citizenship rather their permanent place of residence; and (ii) introducing a reservation of funds requirement. This latter requirement would affect many currency transactions, e.g., the purchase of foreign currency and foreign and Russian securities, disbursement of loans. Under the draft as currently written, certain sums (for most of the transactions - up to 100% of the transaction and for a limited number of transactions such as loans - up to 20%) would be held in a non-interest bearing account with the CBR for a certain period of time (for most of the transactions up to 60 days, for loans - up to one year, for certain export contracts - up to 2 years). The relevant ratios and periods for reservations would be established at the discretion of the CBR or the Russian Government. 10
  11. 11. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine UKRAINE 1. Licensing of Cross-Border Payments for Shares of Ukrainian Issuers On 29 January 2003, the Board of the National Bank of Ukraine (the “NBU”) adopted Resolution No. 36, On Procedure for the Issuance of Individual Licenses of the National Bank of Ukraine to Ukrainian Residents for the Transfer of Foreign Currency from Ukraine Abroad in Payment for Currency Values (“Resolution No. 36”). Resolution No. 36 has introduced, among other things, a procedure for NBU licensing of a Ukrainian resident’s foreign currency payments from Ukraine abroad in consideration for shares of a Ukrainian issuer purchased by the resident from a foreign seller (the “Licensing Procedure”). The new licensing regulation purports to clarify the earlier existing licensing regime, restricting a Ukrainian resident’s ability to make such payments in foreign currency from Ukraine abroad. In the absence of Resolution No. 36, there existed legal uncertainty as to whether the above mentioned payments would be treated by the NBU as (1) payments for “currency values”, which require a Ukrainian purchaser of shares to obtain an individual license of the NBU, (2) “foreign investment” by the Ukrainian resident, or (3) a “repatriation [from Ukraine] abroad of foreign investment in foreign currency, which was earlier made on the territory of Ukraine”, which falls under a statutory exemption from the NBU licensing regime. Following the adoption of Resolution No. 36, this legal uncertainty has been eliminated. Under the licensing procedure, in order to obtain the relevant individual NBU license, a Ukrainian resident will have to provide the NBU with (among other things) documents confirming that the purchase price for the shares corresponds to the “fair” market value of such shares. Given the lack of a mechanism for the determination of a “fair” market value of the shares, a Ukrainian resident may face difficulties in proving to the NBU the fairness of the purchase price. Additional problems in obtaining the individual license are likely to be caused by a wide discretion granted by Resolution No. 36 to the NBU and certain law enforcement agencies in deciding whether to issue the license in a particular situation. 2. NBU Permits Residents of Ukraine to Purchase Ukrainian Sovereign Eurobonds On 29 January 2003, the Board of the National Bank of Ukraine (the “NBU”) adopted Resolution No. 35, On Procedure for the Issuance of Individual Licenses for the Remitting of Funds in Foreign Currency from Ukraine Abroad for the Purpose of Purchase of Bonds of External State Borrowing of Ukraine (“Resolution No. 35”). Resolution No. 35 purports to convert a portion of Ukraine’s external debt into internal debt by permitting a Ukrainian resident to purchase bonds of external state borrowing of Ukraine (“Ukrainian Eurobonds”). Until Resolution No. 35 was adopted, Ukrainian legislation did not, in fact, prevent a Ukrainian resident from acquiring Ukrainian Eurobonds in the secondary market, provided that such acquisition was not prohibited by the relevant terms of issue. However, in the absence of the licensing procedure specifically for the purchase of Ukrainian Eurobonds, a Ukrainian resident was required to obtain an NBU individual license for the payment for “currency values”, which the NBU was reluctant to grant. From a Ukrainian resident’s perspective, Resolution No. 35 has one significant disadvantage. While a Ukrainian resident may purchase Ukrainian Eurobonds from non-residents for freely convertible currency, Ukrainian Eurobonds then may be sold by such Ukrainian resident only for the Ukrainian national currency – Hryvnia. Obviously, such restriction makes Ukrainian Eurobonds a less attractive object of investment by a Ukrainian resident. 11
  12. 12. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine 3. New Currency Control Rules for Cross-Border Payments for Foreign Works/Services On 12 February 2003, the National Bank of Ukraine (the “NBU”) adopted Resolution No. 58, On the Remittance of Funds in National and Foreign Currency as Payment for the Works and Services Rendered by Non-Residents, aimed at restricting the remittance of funds from Ukraine as payment for the works and/or services rendered by non-residents on “commercially unreasonable” terms. Under the Resolution, if the aggregate value of an agreement for the provision of works (services) by a non-resident exceeds USD 50,000 or its equivalent in any other currency, the following documents (among others) must be submitted by the Ukrainian payer to a Ukrainian commercial bank in order to effect the remittance of funds from Ukraine abroad: a) a “price evaluation” act issued by the State Information and Analytical Center for Monitoring External Commodity Markets of the Ministry of Economy of Ukraine (the “Center”) with respect to the compatibility of the contractual price of the works (services) with “regular” market prices; and b) a calculation of the expenses of the non-resident related to the rendering of the works/services, which must be certified by such non-resident. If the Center establishes that the contractual price exceeds the level of the “regular” market price, then the remittance of funds under the agreement would be permitted only upon the receipt by the resident payer of an individual NBU approval. To receive such an individual approval, a resident payer must submit to the NBU a number of documents, including (i) a substantiation of the “higher than regular” price, and (ii) an original or a notarized copy of an audit report on financial expenses of the non-resident service provider for the provision of works/services, issued by a Ukrainian or foreign audit firm (provided that such foreign audit firm is not registered in an “offshore zone” or in a country to which the Financial Action Task Force has applied its sanctions). 4. New Rules on Taxation of Foreign Borrowings The amendments (the “Amendments”) officially published on 22 January 2003, to the Law of Ukraine On the Taxation of Profits of Enterprises (the “Profits Tax Law”) make much clearer the regime of taxation of (i) interest-bearing loans, and (ii) interest-free loans (repayable financial assistance) extended by a non-resident lender to a Ukrainian borrower. The Amendments have supplemented the definition of “financial credit”, which now includes an interest-bearing loan extended by a non-resident creditor which is not a banking-financial institution. Under Article 7.9.1 of the Profits Tax Law, funds received by a taxpayer as a “financial credit” are specifically exempt from taxation, and should not be accounted as gross revenue of the borrower. The taxation of interest-free loans now falls within the ambit of “repayable financial assistance”, defined in Article 1.22.2 of the Profits Tax Law as “the amount of funds transferred to the taxpayer for a limited term use under an agreement providing for no payment of interest or other compensation for the use of such funds”. The amount of such repayable financial assistance will be accounted as the taxpayer’s gross revenue received in the respective reporting period. However, unlike previously, the taxpayer will be able to claim as a deductible expense the amounts of financial assistance repaid to the lender in the relevant following reporting period. 12
  13. 13. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine 5. New Civil and Commercial Codes of Ukraine On 16 January 2003, the Verkhovna Rada (Parliament) of Ukraine adopted a new Civil Code of Ukraine (the “New Civil Code”) and a new Commercial Code of Ukraine (the “Commercial Code”). Subsequently, both the New Civil Code and the Commercial Code (the “Codes”) were signed by the President of Ukraine. The Codes will become effective as of 1 January 2004. While the New Civil Code will substitute the existing Soviet-era Civil Code of Ukraine dated 18 July 1963, the Commercial Code is a new feature of Ukrainian legislation. The New Civil Code is designed to regulate a large spectrum of civil law issues in Ukraine. The New Civil Code consists of 1308 Articles, and is divided into six “books”: (i) Book One – General Provisions; (ii) Book Two – Personal Non-Proprietary Rights of Natural Persons; (iii) Book Three – Ownership and Other Proprietary Rights; (iv) Book Four – Intellectual Property; (v) Book Five – Contractual Undertakings and (vi) Book Six – Inheritance. To the extent it deals with business-related legal issues, the New Civil Code regulates, inter alia, (i) the legal status of natural persons; (ii) the legal status of legal entities of private law (both business and non-business legal entities); (iii) the legal status of the state and its territorial units within the scope of civil-law relations; (iv) the objects of civil rights; (v) agency relations; (vi) property rights; (vii) intellectual property rights; (viii) civil law undertakings; (ix) suretyship; (x) commercial agreements; (xi) civil law undertakings of non-contractual nature; and (xii) torts. Several chapters of the New Civil Code regulate the sphere of financial services: Chapter 71 - Loan, Credit, Bank Deposit, Chapter 72 - Bank Account, Chapter 73 - Factoring, and Chapter 74 - Settlements. The Commercial Code regulates a wide array of legal issues related specifically to business transactions in Ukraine. The Commercial Code consists of 418 Articles, and is divided into the following eight chapters: (i) Foundations of Business Activity; (ii) Business Entities; (iii) Assets of Business Entities; (iv) Business Contracts; (v) Liability in Business Sphere; (vi) Special Provisions for Certain Areas of Business; (vii) Foreign Economic Activity; and (viii) Special Regimes of Business Activity. The Commercial Code regulates, inter alia, (i) the legal status of the state and its territorial units within the scope of business relations; (ii) anti-monopoly and unfair competition issues; (iii) commercial business activity; (iv) non-commercial business activity; (v) provisions regulating the status of subjects of business activity, including enterprises, state and municipal unitary enterprises, companies, enterprises of collective ownership, private enterprises, business amalgamations, and private entrepreneurs; (vi) assets of business entities; (vii) the use of natural resources for business purposes; (viii) the use of intellectual property rights for business purposes; (ix) securities; (x) corporate rights; (xi) commercial contractual undertakings; (xii) commercial agreements; (xiii) prices and price setting within the scope of business activity; (xiv) performance under and the termination of commercial contractual undertakings; (xv) bankruptcy; (xvi) the general commercial liability of business entities; (xvii) compensation of damages in the business sphere; (xviii) contractual penalties; (xix) administrative penalties; (xx) the liability of business entities for violation of the competition legislation; (xxi) special rules governing commercial activity, including supply agreements, contracts on the supply of agricultural products, power supply contracts, the activity of commodity exchanges, property leases and leasing, barter transactions, and warehouse services; (xxii) commercial agency relations; (xxiii) cargo transportation; (xxiv) capital construction; (xxv) innovation activity; (xxvi) banking and financial activity; (xxvii) insurance; (xxviii) securities transactions and stock exchange activity; (xxix) audit activity; (xxx) commercial concessions; 13
  14. 14. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine (xxxi) foreign economic activity; (xxxii) foreign investments; (xxxiii) special (free) economic zones; (xxxiv) concessions; and (xxxv) other special regimes of business activity. The Commercial Code contains a separate chapter, Peculiarities of Legal Regulation of Financial Activities, which outlines major principles of operation of the banking and financial system of Ukraine. Unlike the relevant provisions of the New Civil Code, which regulate the relations among subjects of business activity, the provisions of the Commercial Code focus on the relations between the subjects of business activity and the state. It is expected that the above provisions of the New Civil Code and the Commercial Code relating to the sphere of financial services will be developed in a number of specific legislative acts. To a large extent, the New Civil Code and the Commercial Code have the same subject matter of legal regulation. Although, in theory, the Commercial Code should have addressed the same issues from the administrative point of view, in practice, it establishes rules of conduct which overlap or even contradict to those established by the New Civil Code. 6. Regulations on the State Commission on Regulation of the Financial Services Markets in Ukraine On 4 April 2003, in furtherance of an earlier issued decree establishing the State Commission on Regulation of the Financial Services Markets dated 11 December 2002, the President of Ukraine issued Decree No. 292/2003 (the “FSC Decree”) On Regulation on the State Commission on Regulation of the Financial Services Markets in Ukraine (the “Financial Services Commission”). The FSC Decree sets forth, inter alia, the principal tasks of the Financial Services Commission and provides for the detailed list of its functions and authority. Under the FSC Decree, the Financial Services Commission, as the specialized body of state authority having the principal objective of regulating the financial services markets, is authorized, inter alia, to (i) carry out the state regulation of, and supervision over, activities of financial institutions, including insurance companies, pension funds, trust companies, credit unions, leasing companies, and other legal entities engaged exclusively in rendering of financial services, other than banks and professional participants of the stock market; (ii) register financial institutions and maintain the State Register of Financial Institutions; (iii) make decisions as to the qualification of certain transactions as financial services; and (iv) carry out the licensing of financial institutions. 14
  15. 15. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine CONTACTS For further details and information on the above, or on any other legal aspect of doing business in Russia and Ukraine, please contact: Baker & McKenzie RUSSIA Moscow Office Max Gutbrod, Partner ( David Scott, Partner ( Vladimir Dragunov, Senior Associate ( St. Petersburg Office Maxim Kalinin, Parnter ( Igor Gorchakov, Associate ( UKRAINE Kyiv Office Serhiy Chorny, Partner ( James T. Hitch, III, Partner ( If you would like to receive this newsletter on a regular basis, please contact Alla Izmailova, the CIS Business Development Manager, at 15
  16. 16. Banking & Finance in Russia and Ukraine April 2003 Banking & Finance in Russia and Ukraine The CIS Practice of Baker & McKenzie AZERBAIJAN KAZAKHSTAN RUSSIA - MOSCOW The Landmark Building Samal Towers Sadovaya Plaza, 11th Floor Nizami Street 96, 6th Floor Samal 2, 14th Floor Dolgorukovskaya St., 7 Baku 370010 Zholdasbekov Street Moscow 127006 Telephone: (99-412) 97-18-01 Almaty 480099 Telephone: (7-095) 787-2700 Fax: (99-412) 97-18-05 Telelphone: (7-3272) 50-99-45 Fax: (7-095) 787-2701 Fax: (7-3272) 50-95-79 RUSSIA - ST. PETERSBURG UKRAINE Bolshaya Morskaya Street 57 Millennium Business Center St. Petersburg 190000 12a Volodymyrska St., 5th Fl. Telephone: (7-812) 325-8308 Kyiv 01025 Fax: (7-812) 325-6013 Telephone: (380-44) 490-7070 Fax: (380-44) 490-6787 Worldwide Europe/Middle East Asia Pacific North and South America Amsterdam London Almaty Bogota Juarez San Francisco Antwerp Madrid Baku Brasilia Mexico City Santiago Bahrain Milan Bangkok Buenos Aires Miami Sao Paulo Barcelona Moscow Beijing Calgary Monterrey Tijuana Berlin Munich Hanoi Caracas New York Toronto Bologna Paris Ho Chi Minh City Chicago Palo Alto Valencia Brussels Prague Hong Kong Dallas Porto Alegre Washington, D.C. Budapest Riyadh Manila Guadalajara Rio de Janeiro Cairo Rome Melbourne Houston San Diego Dusseldorf St. Petersburg Shanghai Frankfurt Stockholm Singapore Geneva Vienna Sydney Kyiv Warsaw Taipei Zurich Tokyo © 2003 all rights reserved. This publication is issued periodically to keep Baker & McKenzie clients and other interested parties informed of current legal development that may affect or otherwise be of special interest to them. The comments contained herein do not constitute legal advice or opinion, and should not be regarded as a substitute legal advice. 16