There are opportunities for U.S. banks to operate in the Ukraine under present law. As the authors explain, when the economic scene develops, the opportunities may turn into reality.

Banks and banking activities in the Ukraine are governed by the Law On Banks and Banking Activity ("Banking Law"), which became effective January 17, 2001.

Ukrainian banks may be either universal (general) or specialized. A bank is considered specialized if more than 50 percent of its assets are of one type. Specialized banks include savings banks, investment banks, mortgage banks, and settlement (clearing) banks.

Ukrainian banks may be established as joint stock companies, limited liability companies or cooperative banks. There are also banks 100 percent owned by the State.

The National Bank of Ukraine ("NBU") is the country's central bank, establishing monetary policy and performing bank supervisory functions. NBU is responsible for the registration, licensing and operation of banks, their representative offices, and branches.

Foreign bank

A bank with foreign capital is defined as a bank with more than 10 percent of its capital owned by a non-resident. Registration of such a bank is a two-step procedure comprised of prior NBU approval and actual registration. The prior approval procedure is effectively limited to a review of the business reputation and financial well-being of the founders of the new bank, as well as the legal capacity of the foreign founder (or founders) to participate in a Ukrainian bank. The NBU reserves a one-month period to review a prior approval application. Thereafter, the NBU reserves a three month period to review applications under the general registration procedure.

Minimum authorized capital limits under the Banking Law are based on the bank's scope of operations, as follows:

• For banks active throughout the Ukraine: hryvnia 5 million,
• For commercial banks active only in one region of the Ukraine: hryvnia 3 million,
• For local cooperative banks: hryvnia 1 million.

Minimum authorized capital requirements must be declared prior to registration of the bank with the NBU, with exchange rates fixed as of the date of conclusion of the bank's constituent agreement among shareholders. Authorized capital must be formed exclusively from monetary contributions of the founders, in foreign currency for foreign entities and in hryvnia for Ukrainian entities. A bank's authorized capital may not be lower than the minimum levels indicated above.

Regulatory capital

The Banking Law defines the regulatory capital of a bank as consisting of its (a) primary (or fixed) capital and (b) supplementary capital.

Fixed capital consists of a bank's paid-in and registered authorized capital (described above) as well as its open reserves (including its general risk coverage fund). A bank's capital may not fall below its authorized capital. Supplementary capital, upon the confirmation by the NBU, may not exceed 10 percent of the fixed capital of a bank. Such supplementary capital may consist of:

• closed reserves (not included in the published balance sheet of the bank);
• revaluation reserves (fixed assets and the actual value of long-held securities booked at their historical values);
• hybrid capital instruments (debt/capital instruments which must be unsecured, subordinated and fully paid); and
• subordinated debt (related to debt instruments that are reserved to the bank for at least five years).

A bank is required to meet not only minimum capital requirements, but also capital adequacy requirements based on the ratio of regulatory capital to risk-weighted assets.

For new banks, during their first 12 months of activity, regulatory capital must be equal to at least 15 percent of risk-weighted assets and off-balance sheet liabilities. In the following 12 months, this percentage is reduced to 12 percent. Thereafter, the percentage falls to a standard 8 percent. A bank is prohibited from paying out dividends or otherwise distributing capital if its capital adequacy ratio falls below these levels.

Bank activities

Currently, the NBU licenses only three operations:

• accepting deposits from clients;
• opening and maintaining (including making transfers to and from) settlement accounts for clients and correspondent banks; and
• investment.

These three activities may be conducted simultaneously only by licensed banks. Non-bank institutions may obtain specific licenses from the NBU to engage in the activities indicated in the second and third points above. The Banking Law also lists operations that require separate authorizations from the NBU (but not licensing), such as making capital investments into other companies.

Payments in foreign currency between residents of the Ukraine are prohibited. Salaries paid in the Ukraine similarly must be in hryvnia.

Ukrainian entities are required to sell 50 percent of their foreign currency earnings through authorized banks for conversion into hryvnia, subject to limited exceptions.

In fact, any foreign exchange borrowings require a license from the NBU. Foreign parent companies or shareholders particularly should bear this requirement in mind when structuring and considering the nature of "intra-company borrowings." An NBU-approved loan must be used by the borrower for the purposes set out in the loan agreement, subject to close regulation and supervision by the servicing bank of compliance with the terms of the agreement and corresponding NBU registration certificate.

Maintaining foreign currency in bank accounts abroad, as well as the purchase of securities abroad by a Ukrainian entity or individual, requires a license from the NBU. The only exemption to the latter rule relates to the receipt of securities by Ukrainian individuals through gift or inheritance. Settlements in foreign currency are effected on the inter-bank currency market, under the NBU's supervision, by commercial banks or financial institutions licensed by the NBU to carry out currency operations. NBU currency trading regulations permit a Ukrainian party to settle obligations in foreign currency by asking its bank to buy foreign currency for remittance abroad on the basis of specific documentation.

The pledge law

Tangible or intangible assets may be pledged, including after-acquired assets, such as harvests and production. Certain objects such as state-owned national and historical valuables may not be pledged.

The Pledge Law distinguishes several specific types of pledge. Ipoteka denotes a mortgage in land, immovables, or an "integrated complex of assets of an enterprise." A zaklad denotes a pledge on movables, which need not be possessory; that is, the collateral may generally remain in the debtor's possession. Other types of pledge include a pledge of proprietary rights and a pledge of securities, and, most interestingly, a pledge of "goods in circulation," which is similar in certain respects to a floating charge under English law.

Whatever the object of the pledge, any pledge agreement must be concluded in writing. Notarization is required for mortgages and for pledges of transportation equipment and other assets. The parties also may agree to notarize other pledge agreements. If objects requiring notarization are pledged, the pledger is obligated to keep a book of pledge records and incorporate all information relevant to the pledge in that book.

Pledges over immovable property are recorded in State Notary Registry. A pledge over movable assets may be registered in the State Registry of Movable Property upon request of either the pledgee or pledger.

To the extent a secured party wishes to enforce its security interest over pledged assets, it is often said that the secured party will generally have to seek a court order or judgment, unless a "notarial endorsement" (a separate notarial procedure from the notarization of a pledge agreement) is in place or unless Ukrainian legislation provides otherwise. A secured party can apply directly to a court executor to enforce a pledge. Significantly, when considering enforcement actions, the Pledge Law refers primarily to public sales of pledged property by a court executor from which a secured party is entitled to proceeds.

Bancruptcy law

A creditor may initiate bankruptcy proceedings under the Bankruptcy Law if the creditor's claims exceed 300 statutory minimum wages (currently 55.000 hryvnia) and the debtor's bank verifies the debtor has insufficient funds to cover outstanding debts.

Other security arrangements may also be used, but one must take care to comply in each case with provisions of the Ukrainian Civil Code and other applicable legislation.

The Law On Financial Services and State Regulation of the Financial Services Market became effective August 22, 2001 and subjects to regulation "financial institutions," including banks, credit unions, leasing companies, trust companies, insurance companies, pension funds, investment funds, and any legal entity (Ukrainian or foreign) whose exclusive activity is providing financial services.

As of June 1, 2003, 180 banks were registered in the Ukraine. In fact, only 157 of them operate with the total amount of the authorized capital about 6.514 billion hryvnias (the current rate is 5,3315 USD per 1 hryvnia). Up to the present moment there are 20 banks with participation of foreign capital, seven of them are with 100 percent foreign capital, namely:

• Citibank Ukraine (USA),
• Raiffeisenbank Ukraine (Austria),
• Credit Suisse First Boston Ukraine (Switzerland),
• Credit Lynnais Ukraine (France),
• Bank Pekao (Ukraine) Ltd (Poland),
• ING Bank Ukraine (Holland),
• HVB Bank Ukraine (Germany).

Citibank (Ukraine) became the leader among foreign banks by financial result in 2002, with about 22 million hryvnias, which places it sixth in the domestic bank system.

Foreign banks still do not plan to begin retail operations or to open branches in the Ukraine, but rather will remain focused on corporate customers. (Citibank (Ukraine) has started an Internet-banking system.) Foreign banks that decide to build up a branch network prefer to begin it themselves rather than purchasing a retail bank for a number of reasons. First, they believe that the purchase of a small bank would effectively yield little of value. Second, it is hard to find a bank in the Ukraine that has a network that meets western standards. It is almost impossible to find a local bank on which one can hang up a signboard, for example, "Raiffeisenbank." Neither the level of the personnel nor the loan portofolio satisfy the necessary demands. The same relates to quality and arrangement of the premises. Third, Ukrainian banks do not offer to buy a controlling block of shares although a strategic investor is interested only in that controlling interest. Fourth, the Ukraine historically has had a high level of interest rates but foreign banks are not going to pay high interest. Retail banking with foreign capital will not develop simply in the Ukraine.

Perhaps, the most important obstacle for extension of banks with foreign capital is the high insurance risk of the Ukraine and, consequently, the very low level of direct foreign investments. For example, in Poland, western banks started to buy out local banks when large direct foreign investments already had come into key economic branches: mechanical engineering, metallurgy, electric power industry, etc. Despite the fact the risk of the Ukraine as a country is not estimated yet as adequate for such investments, economic risks are already estimated as normal. Expansion of western banks will become possible when the Ukraine enters the World Trade Organization. Then, foreign banks will change the arrangement of forces in the Ukrainian market as has occurred in Poland, Hungary, Slovakia, Estonia and other former socialist countries. So, in the near future it is unlikely that there will be a large expansion of foreign banks.

It is interesting to note that foreign banks compete very little with Ukrainian banks. They have only few common customers. Spheres that are financed by foreign banks, mainly, are brewing, shipbuilding, and grain trading.

In any event, foreign banks will develop their business in the Ukraine. First, it is interesting and important to support the business of existing clients. Second, it is wise to spread their own bank "geography" and the client base of their own bank business.