Treasury Bills Instead of Cash: About 1,000 Ukrainian Companies Agree to Accept VAT Refunds in Securities

Kyiv, September 27, 2013. The Ukrainian government is preparing to settle part of its debt to businesses for value-added tax (VAT) refunds not with cash, but with securities. About 1,000 Ukrainian companies have preliminarily agreed to receive such compensation in the form of financial treasury bills, reports the publication “Kommersant-Ukraine,” citing its own source. For international investors eyeing Ukraine, this mechanism highlights persistent fiscal risks and liquidity constraints within the country’s economy.

A Repeat of the 2010 Scenario?

A similar mechanism was already used by the government in 2010 to address VAT arrears. At that time, the state offered businesses five-year VAT bonds totaling UAH 20 billion (approx. $2.5 billion) with an annual interest rate of 5.5%. However, companies took securities for only UAH 16.2 billion (approx. $2.025 billion).

Now, short-term treasury bills have been chosen as the instrument. The day before, the Ministry of Revenues and Duties submitted a report to the Finance Ministry, according to which about UAH 12 billion (approx. $1.5 billion) could be allocated for refunds via bills. This amount included both unconfirmed applications as of August 1 and forecast figures from declarations to be filed by November 1.

“Business Has No Choice”: Expert Opinion

Representatives of business associations state that companies have virtually no alternative to such a mechanism.

“Enterprises have no other way to receive VAT, so they will take the bills. I am not aware of any companies that would say they have no problems,” explains Anna Derevyanko, Executive Director of the European Business Association.

Dmytro Oliynyk, Deputy Head of the Council of the Federation of Employers, confirms that selling bills on the secondary market will be the only opportunity for businesses to quickly obtain real money. However, the main risk is the huge discounts they will have to accept when parting with these securities.

“We have received information that discounts will be 30-50%,” notes Oliynyk.

For comparison: the 2010 VAT bonds were sold at a 20-30% discount. Experts suggest the situation could improve if the National Bank of Ukraine starts refinancing commercial banks using these bills as collateral. This could increase demand for them and reduce the discount to around 10%.

Analysis: A Forced Measure with Liquidity Risks

The decision to issue bills is a forced measure amid an acute liquidity shortage in the state treasury. For businesses, this creates a dual situation:

1. Formal Debt Settlement: Companies receive legal confirmation that the state acknowledges its debt.
2. Real Liquidity Problems: To convert a bill into cash, a business will have to sell it on the market at a substantial discount, effectively losing a significant portion of the funds due. This hits companies’ working capital.

Thus, the mechanism temporarily improves state budget indicators but shifts financial difficulties onto the real sector of the economy, exacerbating the problem of working capital shortages.

Conclusion: Awaiting a New Round of Non-Payments

The issuance of treasury bills to settle VAT debt is evidence of ongoing liquidity challenges in public finances. The 2010 mechanism did not solve the problem systemically, and now the situation is repeating itself.

The success of this operation will depend on two factors: the size of the discount at which businesses can sell the bills (which will determine the real losses for companies) and the NBU’s ability to create a secondary market for these securities. In any case, for thousands of Ukrainian enterprises, VAT refunds are once again turning into a complex financial operation with an uncertain outcome, rather than a simple replenishment of working capital.

*Exchange rate as of 27.09.2013: ~1 USD ≈ 8.00 UAH. Conversion of amounts is approximate, for reference only. This information is not financial advice.