Ukraine: Moving Towards the European Banking Model
Ukraine is currently undergoing a period of strong economic growth despite its unstable political environment. The country is led by President Viktor Yushchenko and Prime Minister Viktor Yanukovych, Yushchenko’s political opponent during the 2004 presidential election. Parliamentary elections were held in September 2007 and Yulia Tymoshenko and Yushchenko’s political groups are expected to form a coalition in the next government. Even after this outcome, it seems likely there will be regular bouts of political uncertainty but, from many points of view, Ukraine is still booming economically, with GDP rising year-on-year by 7.7% during January to July 2007. This boom is driven by growth in trade (which rose by 16.1% year-on-year), processing industries (13.1%) and construction (11.9%). Personal consumption and business investment is also increasing (both at a rate of 15%) and expected GDP forecast for 2007 is now 7.2%. Although Ukraine is not a European Union (EU) candidate country, under the leadership of Yushchenko it is looking more towards the EU rather than Russia for its political and macroeconomic model.
The Orange Revolution at the end of 2004 came about as Yanukovych’s victory in the presidential election sparked mass protests, resulting in the election re-run that was won by Yushchenko. This event elevated Ukraine’s global profile and is also seen as the starting point of the real interest shown by foreign investors in the country’s financial services sector. The interest of foreign investors has also been spurred by the huge potential of the consumer financing market, which is just starting to emerge in Ukraine.
The Ukrainian hryvnia is not yet fully convertible, but is expected to be completely deregulated by the end of 2008. The implementation of legislation to create partial convertibility was delayed this year by Ukraine’s latest political crisis (parliament was dissolved in early 2007). Oleksandr Savchenko, deputy chairman of the National Bank of Ukraine, said in May 2007: “Ukraine will achieve full convertibility of its hryvnia currency within a year and a half and investors should prepare for the currency to become more freely floating. In one to one-and-a-half years, the Ukrainian hryvnia will be a fully convertible currency like the Russian rouble.”
Cash is still the dominant payment method in Ukraine but electronic credit transfers are gaining in popularity and are the most popular cashless method of making payments. The use of payment cards has also increased, both in terms of volume and value, over recent years.
Electronic banking is becoming increasingly popular in Ukraine, although there is no bank-independent electronic banking standard. Domestic and inter-bank payments in Ukraine are made through the real-time settlement system, called the System of Electronic Payments (SEP), which has been in place since the mid 1990s and is owned and operated Ukraine’s central bank, the National Bank of Ukraine. All domestic payments must be made in the domestic currency, the hryvnia. As of 1 October 2007, SEP had 1,618 participants in its inter-bank settlement system. The SEP differentiates between urgent and non-urgent payments although not all Ukrainian commercial banks offer this service because, according to Ukrainian legislation, all clients’ payments should be made with same-day value if the balance of the clients’ account with the commercial bank is sufficient for that transaction.
Payment card volumes in Ukraine are rising steadily and the total number of payment cards issued by Ukrainian banks was 35.65 million as of July 2007. The number of automatic teller machines (ATMs) increased in the first half of 2007 by 19%, up to 17,464. In the first half of 2007, the number of transactions with payment cards issued by Ukrainian banks increased by 17 million (7%) year-on-year and equalled more than 248 million, while the transaction amount increased by Ukrainian hryvnia (UAH) 30.1bn (47%) up to UAH93.6bn.
Liquidity management remains a great challenge for banks and corporates in Ukraine. Cash concentration structures are not regulated by Ukrainian laws and can be treated as inter-company lending, which is the sole prerogative of financial institutions.
However, cash pooling structures are particularly in demand from MNCs and some banks offer notional cash pooling. The notional cash pooling structure is allocated as a back-to-back solution under the lending facility available to the legal entities and takes the value of the hryvnia daily closing balances of each of the company’s entities. Interest is paid on all positive balances based on a rate pre-arranged between the entity and the bank.
Opening a current account abroad is one way that resident companies can participate in a cross-border pooling structure. However, it is necessary to obtain a special licence from the National Bank of Ukraine before opening a foreign current account.
In terms of excess liquidity investments, term deposits in local or foreign currency are available in Ukraine, as well as the local fixed income markets, including hryvnia government bonds and corporate bonds.
The Ukrainian banking market is expected to become more competitive as a result of deregulation of the banking industry, which will permit foreign banks to operate branch offices in Ukraine. Presently, foreign banks may operate only representative offices or Ukrainian subsidiaries. This will open up more possibilities for the Ukrainian banks to develop new services and products, and to introduce a new advanced format of payments and cash management systems which are in particularly high demand from multinational clients. Ukraine is currently in the process of acceding to the World Trade Organisation (WTO) and this will also mean increasing standardisation of the financial environment and will result in a more attractive environment for foreign investors.