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Banking & Finance in Russia and UkraineNewsletter 03/03, April 2003

Banking & Finance in Russia and UkraineNewsletter 03/03, April 2003

Banking & Finance inRussia and UkraineBaker & McKenzie NewsletterApril 2003

As reform in Russia’s financial sector gains momentum, Baker & McKenzie continues to publishthis newsletter, which covers the major legal developments in this sector. Considering the dynamicgrowth of the financial market in Ukraine, we have expanded the substance of the newsletter to alsohighlight the developments in the Ukrainian banking & finance sector. This is our third issue.

Table of ContentsRUSSIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

A. RECENT LEGISLATIVE DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31. 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 . . . . . . . . . . . . . . . . . . . . 53. Non-State Pension Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64. Money Laundering Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

B. DRAFT LEGISLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81. Draft Derivatives Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82. Securitization and the Draft Law On Mortgage-Backed Securities . . . . . . . . . . . . . . . . . . 93. Draft of a New Federal Law On Currency Regulation and Currency Control . . . . . . . . . . 9

UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111. Licensing of Cross-Border Payments for Shares of Ukrainian Issuers . . . . . . . . . . . . . . . . 112. NBU Permits Residents of Ukraine to Purchase Ukrainian Sovereign Eurobonds . . . . . . 113. New Currency Control Rules for Cross-Border Payments for Foreign Works/Services . . . 124. New Rules on Taxation of Foreign Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125. New Civil and Commercial Codes of Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136. Regulations on the State Commission on Regulation

of the Financial Services Markets in Ukraine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

CONTACTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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April 2003Banking & Finance in Russia and Ukraine

RUSSIAA. RECENT LEGISLATIVE DEVELOPMENTS

1. Securities Market Law

In December 2002, the Federal Law On the Securities Market (the “Securities Law”) wasamended, with most of the new provisions coming into effect on 30 December 2002. Theseamendments have introduced several significant changes to the existing framework ofsecurities 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 anexpress provision to the contrary in another federal law. Previously-issued certificates ofregistered securities are now considered as merely extracts of the shareholder register. Bearerform securities, on the other hand, may only be issued in a documentary form. We believethat this change is useful to streamline the existing securities regime.

Secured Bonds

The amendments to the Securities Law now expressly authorize the issuance and circulationof 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 thedevelopment of an asset-backed financing market in Russia. While these bonds may besecured by pledges of securities and immovable property, sureties and guarantees issued bybanks and certain governmental entities, it appears that at the moment they cannot besecured by other types of security instruments or other assets (e.g., equipment, goods, orintangible assets).

Importantly, the amendments now address the mechanics of concluding a security or suretyagreement with an unlimited number of bond investors whose identity may not be known atthe outset. To remedy the problem of needing to conclude a security agreement with eachinvestor, the amendments provide that an appropriate security agreement is deemed to beconcluded upon the investor’s purchase of the bonds and the requirement of a writtensecurity agreement is deemed to have been satisfied. The terms and conditions of the securitymust be set out: (i) in the decision to issue the bonds; (ii) in the prospectus, if registration ofthe prospectus is required; (iii) on the actual bond certificate where the bonds are indocumentary form. All issues relating to the provision of security for the bonds are governedby Russian law (even if the security is provided by a foreign party), with Russian courtshaving exclusive jurisdiction to resolve those issues.

The amendments also address the procedure for transferring secured bonds, declaring adefault under them and enforcing the security, as well as application of recovered proceeds.Nevertheless, issues relating to the enforcement of the security remain. Furthermore, theRussian Federal Commission on the Securities Market (the “FCSM”) does not appear toforesee 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 SecuritiesLaw, an option is a registered “issuable” security fixing the right to buy, during a specified

period or upon the occurrence of specified conditions, a fixed number of the issuer’s sharesat the fixed price. The issuer may issue options only after its charter capital has beenpaid-up in full. An option may not entitle its holder to acquire: (i) more shares than the totalamount of the authorized shares; or (ii) more than 5% of each class of the issuer’s sharesoutstanding at the time of registration of the options issue.

The procedure for the placement of options is the same as for the placement of securitiesconvertible into shares. The placement of the shares underlying the option must be at theprice set forth in the option.

ADRs

The amendments also set forth the general procedure for obtaining FCSM authorization toestablish an ADR program, enabling the circulation of Russian securities in foreign capitalmarkets. The conditions for obtaining authorization are: (i) state registration of the Russiansecurities underlying the ADRs; (ii) the listing of the underlying securities on at least oneRussian stock exchange or other trading organizer; (iii) the amount of Russian securities tobe 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 expressinstruction of the ADR holders; and (v) compliance with other conditions set forth inRussian federal laws.

FCSM is obligated to issue a decision on an application to establish an ADR programwithin 30 days from the date of submission of all the necessary documents, with the rightto request additional documents and information and verify them during an extensionof up to 30 days.

Foreign Securities

The amended Securities Law now also sets forth the general procedure for placing andcirculating foreign securities in Russia. Securities of foreign issuers may be placed andpublicly circulated in Russia subject to existence of an appropriate treaty between Russiaand the foreign issuer’s jurisdiction. This restriction, however, does not apply toInternational Financial Institutions (IFIs). The Russian Government has yet to approvethe list of IFIs which will be permitted to publicly place securities in Russia without anyspecial authorization, although those securities will still need to undergo stateregistration with the FCSM.

The recording of rights to foreign securities offered in Russia must be done throughdepositories holding a valid FCSM license. The documentation to be presented by aforeign issuer for state securities registration will be the subject of special FCSMregulations not yet issued.

Financial Advisors

The amendments also introduced regulation of securities market financial advisors. Underthe new law, a financial advisor is a legal entity, unaffiliated with the issuer, which assists inthe preparation of a securities offering circular (prospectus). A financial advisor must holda valid broker/dealer license.

As of 1 April 2003, for the public placement or circulation of securities in Russia, theprospectus must be signed by the financial advisor, who thereby certifies the accuracy andcompleteness of the information presented, excluding information certified by the auditoror the appraiser. The financial advisor together with any other party signing the prospectushave secondary joint and several liability for damages suffered by investors as a result of

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inaccurate, incomplete or misleading information in the prospectus, except the issuer whoseliability 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 ofprices or trading activity vis-‡-vis the actual price or trading activity level for the purpose ofinducing investors to buy or sell publicly placed or circulated securities. Price manipulationincludes, 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 thesecurities’ ownership; (iii) the simultaneous issuance of instructions to buy and sell securitiesat prices considerably different from the current market prices for analogous transactions;and (iv) agreement between two or more market participants or their representatives to buyor sell securities at prices considerably different from the current market prices for analogoustransactions. Stock exchanges are required to adopt measures to prevent pricemanipulation. If evidence of price manipulation is discovered, the FCSM will conduct aninvestigation in accordance with the procedure set forth in the Regulation On the Procedureof Investigating the Activities of Individuals that are Characteristic of Price Manipulation on theSecurities Market (approved by FCSM Resolution dated 7 February 2003). If thisinvestigation confirms that price manipulation has occurred, the penalties may include finesas 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 ofthe 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 exportproceeds to foreign bank accounts. Article 5 now expressly provides that residents maydeposit in foreign banks the proceeds from the export of goods, works, services and resultsof intellectual activity in the amount necessary to perform their obligations under loanagreements concluded with non-residents acting on behalf of OECD governments. Oncedeposited, such export proceeds may only be used to discharge obligations under that loanagreement. Although Russian Central Bank permission will still be necessary, oncegranted, the export proceeds will no longer be subject to mandatory conversion intorubles. This will remove the currency conversion risk that structures like “Lucille” aretrying to address and, as a consequence, will allow Russian borrowers to obtain lessexpensive funds.

The amendments to Articles 6 and 8 of the Currency Law changed the procedure forindividuals exporting currency valuables and foreign cash. From 14 March 2003, bothresident and non-resident individuals are now subject to the same restrictions for exportingcurrency valuables and foreign cash. Currency valuables (excluding foreign cash) that werepreviously imported or transferred into Russia may be exported or transferred within theamount indicated in the customs declaration or other document confirming properimportation. Up to USD 10,000 in foreign currency can now be exported without anyspecial authorization plus an amount of foreign currency equal to that previously importedinto Russia as indicated in a customs declaration. An individual must declare sums overUSD 3,000 in an export customs declaration; sums below USD 3,000 are not subject tomandatory declaration.


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3. Non-State Pension Funds

The amendments to the Federal Law On Non-State Pension Funds (the “NSPF Law”) whichcame into effect on 13 January 2003 introduced significant changes into the authorizedactivities, functions and licensing of non-state pension funds, reconciling this law with otherpension-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 agovernmental 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 fundmembers. An NSPF engaged in providing permitted insurance services is responsible forcollecting pension savings, investing and accounting for those savings, and making paymentto the insured individuals.

The amendments establish requirements for obtaining an NSPF license where nonepreviously existed. In order to obtain and retain a license, an NSPF must have chartercapital of not less than 3 million rubles. This amount will increase to 30 million rubles on1 January 2005, and again to 50 million rubles on 1 July 2009. Additionally, theamendments impose minimum qualifications on a NSPF’s chief executive and chiefaccountant. 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 setsforth procedures for concluding, amending and terminating it. The law leaves theresponsibility for preparing a standard form of obligatory pension insurance contractincorporating the law’s mandatory provisions to the Russian Government. The law alsoregulates the transfer of pension fund assets from one NSPF to another or to the federalPension Fund as well as the transfer of pension accounts.

For an NSPF which provides obligatory pension insurance, the amendments impose specificrestrictions as to the structure of its investment portfolio:

• The securities of an issuer or a group of related issuers may not exceed 5% of theinvestment 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;

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• 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 ofcirculated 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 thatissuer, with the exception of Russian state securities, and may not exceed 15% ofthe securities issued by a constituent member of the Russian Federation;

• Ruble and foreign currency assets may not exceed 20% of the investmentportfolio; 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 theInvestment of Retirement Pension Accumulations, the Russian Pension Fund is empowered toinvest pension contributions through a duly-licensed management company. Furthermore,this management company may be a state-owned company. In a resolution dated22 January 2003, the Russian government designated Vneshekonombank as the statemanagement company for the trust management of pension accumulations for insureds whohave 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 moneylaundering and the financing of terrorism. The primary law in this area is the aptly titledFederal Law On Countering the Legalization of Revenues Obtained through Criminal Activity(Money Laundering) and Financing Terrorism, dated 7 August 2001 (the “MoneyLaundering Law”). Under Article 7 of this law, each bank or other organization performingan 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 itsown initiative if it has reason to believe that a transaction is likely to involve moneylaundering or terrorism financing, present all transaction documentation to the appropriategovernmental agency. Disclosure to the authorized is not a breach of any duty ofconfidentiality.

Earlier this year, the Russian Central Bank (the “CBR”) adopted several regulations infurtherance of the Money Laundering Law. CBR Regulation ‹ 207-P, effective20 January 2003, sets forth the procedure for credit organizations to disclose informationon suspicious transactions. Additionally, CBR Instruction ‹ 177-T, dated 24 December2002, establishes CBR’s procedure for conducting regular inspections of creditorganizations and their branches to confirm compliance with money laundering legislation.


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B. DRAFT LEGISLATION

1. Draft Derivatives Legislation

The mid-March Russian Duma derivatives workshop with ISDA and major market playersdemonstrated not only the need for comprehensive Russian derivatives regulation to providegreater certainty but also Russian regulators’ commitment to this goal. Two alternativeapproaches to regulating the derivatives market have been proposed. Under the firstapproach, existing laws such as the Civil Code and laws on banking and insolvency wouldbe amended to provide legal certainty in enforceability of derivative contracts and permitclose-out netting in insolvency. The second approach proposes the adoption of acomprehensive specialized law on derivatives which would take a broader approach toregulating the derivatives market in general. The Duma is now considering several draftlaws 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 anadditional paragraph to provide that derivative contracts are not gambling and should beenforceable on general terms. This amendment would exclude the application of the “byway of business”, “for hedging purposes” or similar tests in establishing whether a particularderivative transaction should be judicially enforced.

Law On Banks and Banking Activity

The proposed amendments to the Federal Law On Banks and Banking Activity wouldexpressly include derivative transactions in the list of banking operations and othertransactions in which a credit institution may engage. The definition of derivativetransactions would include forwards, futures and options, under which the value of theobligation depends on price fluctuations of foreign currency, securities, precious metals andstones, 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 forconcluding derivative transactions and adopt model contracts for different types ofderivative transactions in accordance with international standards and practice. Specialattention would be paid to the protection of interests of the clients of credit institutionswhen entering into derivative transactions. A credit institution that enters into aderivative transaction on its customer’s account would be required to inform thecustomer in writing, prior to the conclusion of the contract, of the risk of loss associatedwith the derivative transaction. The amendments would specify the substance of and theprocedure for disclosure.

Draft Law On Derivatives

On 19 March 2003, a group of deputies under the auspices of the Duma Committee onProperty submitted a draft law, On Derivatives (the “Draft Derivatives Law”), to the Dumafor consideration. The Draft Derivatives Law is an attempt to create a complex and detailedregulation of the derivatives market in a single legislative act. It includes provisions on thedefinition of derivatives, their types, form and principal conditions for contracts, regulationof 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 theprovisions of the Draft Derivatives Law, etc.

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Unfortunately, neither approach has yet properly addressed the issue of enforceability ofclose-out netting arrangements in insolvency. While some draft laws on netting are beingconsidered, it is clear that the derivatives market in Russia will not see any substantialgrowth without adequately addressing the issue of close-out netting. In the meantime, sometechniques are being developed in an effort to implement close-out netting arrangementswithin the existing legal environment.

Finally, although the Draft Derivatives Law has already been criticized, it still remains to beseen 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 participantsand regulators. At the end of 2002, the Duma Banking Committee created a special groupto examine the legislative basis for securitization. Further, a special working group of thePresidium of the State Council has also taken up securitization. A major two-day seminaron securitization in Russia and Kazakhstan will take place in early July in Moscow with theparticipation of regulators, professional advisors and market players.

The current Russian regulatory environment permits only a limited number of assets andstructures that can be used to achieve a “true sale” securitization. It is clear that thedevelopment of the securitization market in Russia will require a more comprehensiveregulatory framework. The legislative work on the draft law On Mortgage-BackedSecurities (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 theprevious issue of this Newsletter for more details on the draft law). On 17 March 2003,the Duma Committee on Credit Organizations and Financial Markets recommendedthat the Draft MBS Law be forwarded for second reading.

Notwithstanding the fact that the Draft MBS Law will be undergoing second readingshortly, one of the main questions still remains to be resolved – that is, do banks havethe right to directly participate in the issue of mortgage-backed securities or may thisonly be done by specialized mortgage agencies. In its present form, the draft allowsbanks to issue mortgage-backed securities subject to certain capital and otherrequirements to be established by the CBR. One such requirement is that a bank issuingmortgage-backed securities have at least 60% of its assets in mortgage loans.

3. Draft of a New Federal Law On Currency Regulation andCurrency Control

On 14 March 2003, the governmental draft of the federal law On Currency Regulation andCurrency Control passed first reading in the Russian Duma, defeating two competingversions. It is expected that prior to the second reading, the draft will undergo significantchanges. Assuming that the legislative work will proceed as initially planned, a version ofthe draft law is expected to enter into force in early 2004. If adopted, the draft law isexpected to be a transitional law to a subsequent lifting of the exchange control regulationsin Russia in 2007.

Generally, the draft law is superior to the current law in both form and substance. Thescope of the CBR’s “regulation-forming” authority has been narrowed and theadministrative barriers to currency transactions have been reduced. Responsibility forcurrency regulation would be shared between the Russian Government and the CBR.


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Some of the proposed changes, however, have already drawn criticism as representinga step back from liberalization of the currency control regulations in Russia. Thesechanges include:

(i) determining residency of Russian individuals for currency control purposes bycitizenship 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 offoreign currency and foreign and Russian securities, disbursement of loans. Under the draftas currently written, certain sums (for most of the transactions - up to 100% of thetransaction and for a limited number of transactions such as loans - up to 20%) would beheld in a non-interest bearing account with the CBR for a certain period of time (for mostof 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 thediscretion of the CBR or the Russian Government.

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UKRAINE1. Licensing of Cross-Border Payments for Shares of Ukrainian Issuers

On 29 January 2003, the Board of the National Bank of Ukraine (the “NBU”) adoptedResolution No. 36, On Procedure for the Issuance of Individual Licenses of the NationalBank of Ukraine to Ukrainian Residents for the Transfer of Foreign Currency from UkraineAbroad in Payment for Currency Values (“Resolution No. 36”). Resolution No. 36 hasintroduced, among other things, a procedure for NBU licensing of a Ukrainian resident’sforeign currency payments from Ukraine abroad in consideration for shares ofa Ukrainian issuer purchased by the resident from a foreign seller (the “LicensingProcedure”). The new licensing regulation purports to clarify the earlier existing licensingregime, restricting a Ukrainian resident’s ability to make such payments in foreigncurrency from Ukraine abroad.

In the absence of Resolution No. 36, there existed legal uncertainty as to whether the abovementioned 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 territoryof 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, aUkrainian resident will have to provide the NBU with (among other things) documentsconfirming that the purchase price for the shares corresponds to the “fair” market value ofsuch shares. Given the lack of a mechanism for the determination of a “fair” market valueof the shares, a Ukrainian resident may face difficulties in proving to the NBU the fairnessof the purchase price. Additional problems in obtaining the individual license are likely tobe caused by a wide discretion granted by Resolution No. 36 to the NBU and certain lawenforcement agencies in deciding whether to issue the license in a particular situation.

2. NBU Permits Residents of Ukraine to Purchase UkrainianSovereign Eurobonds

On 29 January 2003, the Board of the National Bank of Ukraine (the “NBU”) adoptedResolution No. 35, On Procedure for the Issuance of Individual Licenses for the Remitting ofFunds in Foreign Currency from Ukraine Abroad for the Purpose of Purchase of Bonds ofExternal State Borrowing of Ukraine (“Resolution No. 35”). Resolution No. 35 purports toconvert a portion of Ukraine’s external debt into internal debt by permitting a Ukrainianresident to purchase bonds of external state borrowing of Ukraine (“Ukrainian Eurobonds”).

Until Resolution No. 35 was adopted, Ukrainian legislation did not, in fact, prevent aUkrainian resident from acquiring Ukrainian Eurobonds in the secondary market, providedthat such acquisition was not prohibited by the relevant terms of issue. However, in theabsence of the licensing procedure specifically for the purchase of Ukrainian Eurobonds, aUkrainian 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 freelyconvertible currency, Ukrainian Eurobonds then may be sold by such Ukrainian residentonly for the Ukrainian national currency – Hryvnia. Obviously, such restriction makesUkrainian Eurobonds a less attractive object of investment by a Ukrainian resident.


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3. New Currency Control Rules for Cross-Border Payments forForeign Works/Services

On 12 February 2003, the National Bank of Ukraine (the “NBU”) adopted ResolutionNo. 58, On the Remittance of Funds in National and Foreign Currency as Payment for theWorks and Services Rendered by Non-Residents, aimed at restricting the remittance of fundsfrom 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, thefollowing documents (among others) must be submitted by the Ukrainian payer to aUkrainian 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 forMonitoring External Commodity Markets of the Ministry of Economy of Ukraine(the “Center”) with respect to the compatibility of the contractual price of theworks (services) with “regular” market prices; and

b) a calculation of the expenses of the non-resident related to the rendering of theworks/services, which must be certified by such non-resident.

If the Center establishes that the contractual price exceeds the level of the “regular” marketprice, then the remittance of funds under the agreement would be permitted only upon thereceipt by the resident payer of an individual NBU approval. To receive such an individualapproval, 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 copyof an audit report on financial expenses of the non-resident service provider for theprovision of works/services, issued by a Ukrainian or foreign audit firm (provided that suchforeign audit firm is not registered in an “offshore zone” or in a country to which theFinancial 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 Lawof Ukraine On the Taxation of Profits of Enterprises (the “Profits Tax Law”) make muchclearer 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 nowincludes an interest-bearing loan extended by a non-resident creditor which is not abanking-financial institution. Under Article 7.9.1 of the Profits Tax Law, funds received bya taxpayer as a “financial credit” are specifically exempt from taxation, and should not beaccounted as gross revenue of the borrower.

The taxation of interest-free loans now falls within the ambit of “repayable financialassistance”, defined in Article 1.22.2 of the Profits Tax Law as “the amount of fundstransferred to the taxpayer for a limited term use under an agreement providing for nopayment of interest or other compensation for the use of such funds”. The amount of suchrepayable financial assistance will be accounted as the taxpayer’s gross revenue received inthe respective reporting period. However, unlike previously, the taxpayer will be able toclaim as a deductible expense the amounts of financial assistance repaid to the lender in therelevant following reporting period.

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5. New Civil and Commercial Codes of Ukraine

On 16 January 2003, the Verkhovna Rada (Parliament) of Ukraine adopted a new CivilCode 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 effectiveas of 1 January 2004. While the New Civil Code will substitute the existing Soviet-eraCivil Code of Ukraine dated 18 July 1963, the Commercial Code is a new feature ofUkrainian 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) BookOne – General Provisions; (ii) Book Two – Personal Non-Proprietary Rights of NaturalPersons; (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 Coderegulates, inter alia, (i) the legal status of natural persons; (ii) the legal status of legal entitiesof private law (both business and non-business legal entities); (iii) the legal status of thestate and its territorial units within the scope of civil-law relations; (iv) the objects of civilrights; (v) agency relations; (vi) property rights; (vii) intellectual property rights; (viii) civillaw undertakings; (ix) suretyship; (x) commercial agreements; (xi) civil law undertakings ofnon-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, andChapter 74 - Settlements.

The Commercial Code regulates a wide array of legal issues related specifically to businesstransactions in Ukraine. The Commercial Code consists of 418 Articles, and is divided intothe 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 itsterritorial units within the scope of business relations; (ii) anti-monopoly and unfaircompetition issues; (iii) commercial business activity; (iv) non-commercial businessactivity; (v) provisions regulating the status of subjects of business activity, includingenterprises, state and municipal unitary enterprises, companies, enterprises of collectiveownership, private enterprises, business amalgamations, and private entrepreneurs; (vi)assets of business entities; (vii) the use of natural resources for business purposes; (viii) theuse of intellectual property rights for business purposes; (ix) securities; (x) corporaterights; (xi) commercial contractual undertakings; (xii) commercial agreements; (xiii)prices and price setting within the scope of business activity; (xiv) performance under andthe termination of commercial contractual undertakings; (xv) bankruptcy; (xvi) thegeneral commercial liability of business entities; (xvii) compensation of damages in thebusiness sphere; (xviii) contractual penalties; (xix) administrative penalties; (xx) theliability of business entities for violation of the competition legislation; (xxi) special rulesgoverning commercial activity, including supply agreements, contracts on the supply ofagricultural products, power supply contracts, the activity of commodity exchanges,property leases and leasing, barter transactions, and warehouse services; (xxii) commercialagency relations; (xxiii) cargo transportation; (xxiv) capital construction; (xxv) innovationactivity; (xxvi) banking and financial activity; (xxvii) insurance; (xxviii) securitiestransactions and stock exchange activity; (xxix) audit activity; (xxx) commercial concessions;


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(xxxi) foreign economic activity; (xxxii) foreign investments; (xxxiii) special (free) economiczones; (xxxiv) concessions; and (xxxv) other special regimes of business activity.

The Commercial Code contains a separate chapter, Peculiarities of Legal Regulation ofFinancial Activities, which outlines major principles of operation of the banking andfinancial system of Ukraine. Unlike the relevant provisions of the New Civil Code, whichregulate the relations among subjects of business activity, the provisions of the CommercialCode 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 Coderelating to the sphere of financial services will be developed in a number of specificlegislative acts.

To a large extent, the New Civil Code and the Commercial Code have the same subjectmatter of legal regulation. Although, in theory, the Commercial Code should have addressedthe same issues from the administrative point of view, in practice, it establishes rules ofconduct which overlap or even contradict to those established by the New Civil Code.

6. Regulations on the State Commission on Regulation of theFinancial Services Markets in Ukraine

On 4 April 2003, in furtherance of an earlier issued decree establishing the StateCommission on Regulation of the Financial Services Markets dated 11 December 2002,the President of Ukraine issued Decree No. 292/2003 (the “FSC Decree”) On Regulationon the State Commission on Regulation of the Financial Services Markets in Ukraine (the“Financial Services Commission”). The FSC Decree sets forth, inter alia, the principaltasks of the Financial Services Commission and provides for the detailed list of itsfunctions and authority.

Under the FSC Decree, the Financial Services Commission, as the specialized body of stateauthority having the principal objective of regulating the financial services markets, isauthorized, inter alia, to (i) carry out the state regulation of, and supervision over, activitiesof financial institutions, including insurance companies, pension funds, trust companies,credit unions, leasing companies, and other legal entities engaged exclusively in rendering offinancial 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.

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CONTACTSFor further details and information on the above, or on any other legal aspect of doingbusiness in Russia and Ukraine, please contact:

Baker & McKenzie

RUSSIA

Moscow Office

Max Gutbrod, Partner ([email protected]) David Scott, Partner ([email protected]) Vladimir Dragunov, Senior Associate ([email protected])

St. Petersburg Office

Maxim Kalinin, Parnter ([email protected])Igor Gorchakov, Associate ([email protected])

UKRAINE

Kyiv Office

Serhiy Chorny, Partner ([email protected])James T. Hitch, III, Partner ([email protected])

If you would like to receive this newsletter on a regular basis, please contact Alla Izmailova,the CIS Business Development Manager, at [email protected].

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