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WorldMay 1 2014

Crimea stuck in financial limbo

The ongoing dispute over the sovereignty of the Ukrainian republic of Crimea, which is currently occupied by Russian forces, has wreaked havoc in its financial sector, with many banks pulling out of the region and depositors unable to access their funds.
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Crimea stuck in financial limbo

While Crimea represented just 3.7% of Ukraine’s GDP and was a net budget drain, the de facto loss of the territory – famed for its tourism – jolted Ukrainians. It also created a legislative and operational headache for banking that, in the end, seems to have sorted itself out far more quickly than the political situation ever could.

Once Russia had announced its annexation of Crimea – a move that was not recognised by the international community – the Central Bank of Russia (CBR) announced that Ukrainian banks would need to start following its rules. It stated that Ukraine’s hryvnya would be legal tender until 2016, after which Crimea would become a ruble-only area. On April 18, however, Crimea’s acting leader, Sergei Aksionov, told reporters that Crimea would switch completely to a ruble-based economy in two to three weeks.

Adapting Ukrainian legislation and central banking will take longer. National Bank of Ukraine (NBU) governor Stepan Kubiv points out that Alfa Bank closed its Crimea operation precisely because activity there would be contrary to the laws of Ukraine. “Such questions should be settled with the passage and implementation of the bill ‘On ensuring civil rights and freedoms and the legal regime on temporarily occupied territory of Ukraine’. The legislation will fix Crimea as a temporarily occupied territory. This, in turn, enables us to resolve issues related to the economic activities of Ukrainian entities in Crimea,” he says.

Logistical nightmare

On an operational level, central banking in Crimea has changed drastically. Previously, the autonomous republic had its own central bank under the NBU to handle the region’s commercial banks as well as state payments. The servicing of commercial banks had stopped completely by early April 2014, leaving only real cash receipt and storage functioning.

Mr Kubiv says that state pension and social benefits payments are now being routed through banks on the mainland. “This also applies to the provision of other banking and settlement services to citizens residing in Crimea,” he says. However, at least one Crimean retail banking client claims that mainland merchants refused to accept his card once they found out that it had been issued against a Crimea-based account.

Existing commercial banks, whether they had sister companies in Russia or not, have mostly chosen to close their Crimea operations. Some, such as Alfa, partly owned by a Russian billionaire, cite the contradiction with Ukrainian legislation. Russian banks are moving in and out. Russian television network Russia Today reports that Bank Rossiya, which is on the US sanctions list, is moving into Crimea, while Ukraine’s VTB – a daughter company of Russia’s VTB – has closed 75% of its Crimean branches. By April 17, when a deadline for conformity with CBR regulation passed, all Ukrainian banks had left the market.

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