Well functioning capital markets and financial institutions will play a critical role in Ukraine’s recovery from Russia’s full scale invasion, by helping to attract much needed foreign investment and supporting domestic financing. This report assesses Ukraine’s current legal, regulatory and institutional framework for financial markets, corporate governance, public debt management, financial consumer protection and financial literacy, and asset-backed pensions. It identifies key challenges across these interconnected policy areas, including areas where alignment with OECD standards could be enhanced. It also outlines priority areas in which the OECD will continue to support Ukraine in 2025.
Mapping Ukraine’s Financial Markets and Corporate Governance Framework for a Sustainable Recovery
Abstract
Executive Summary
At the onset of the third anniversary of Russia’s full-scale invasion, Ukrainian policy makers and regulators are continuing their efforts to support the functioning of the country’s financial system and its businesses. The country has shown strong resilience in the face of continuous military aggression, including widespread strikes against critical energy and other infrastructure. The war has led to massive reconstruction costs for Ukraine, especially in the housing, transport, industrial, energy and agricultural sectors.
The expected recovery and reconstruction needs over the coming decade are estimated at USD 486 billion, or approximately 2.8 times Ukraine’s nominal GDP in 2023. As the war continues, these financing needs will continue to grow. In this context, it will be crucial to develop well-functioning capital markets and financial institutions to attract much-needed foreign investment and grow domestic finance.
Such efforts must be based on a comprehensive assessment of the current legal, regulatory and institutional framework. This report maps the current context in Ukraine, covering five inter-related policy areas: Ukraine’s financial system framework; the domestic corporate governance framework; public debt management policies and practices; financial consumer protection and financial literacy; and asset-backed pensions. It uses OECD legal instruments and Member practices to assesses the laws, policies and practices in Ukraine. It identifies key challenges in each policy area and proposes priority areas where the OECD will support reform efforts over the course 2025.
Ukraine’s financial system and regulatory framework have shown strong resilience, but structural issues continue to hinder the mobilisation of private sector finance for the recovery. Proactive regulatory interventions and international assistance have allowed banks and other financial institutions to continue providing services and adapt to the war conditions. However, the financial sector remains small compared to peer countries, with banks holding 76% of financial assets in Q2 2024. The growth in bank lending has also been subdued relative to deposit growth over the last decade, reflecting both supply and demand constraints. On the supply side, the high level of non-performing loans (NPLs) weigh on the banks’ lending capacity, with an average NPL ratio of 34.6% in June 2024. In the highly uncertain war context, banks are also holding a relatively large share of liquid instruments and domestic government bonds. Government-subsidised lending programmes are helping to bridge the funding gap, especially for businesses and individuals most directly affected by the hostilities. However, these programmes cannot replace market-based financing in the long term, given their fiscal costs and the contingent liability risks.
Domestic capital markets will also need to play an important role in leveraging domestic and international investment for the reconstruction. However, these markets are small and underdeveloped – with the current total market capitalisation estimated at around USD 1.6 billion – and activity is dominated by government bond trading. Stimulating capital market development will require strengthening the domestic regulatory and legal framework, and continuing to integrate with international markets, in particular via Ukraine’s alignment with the European Union (EU) framework. Ukrainian authorities have an ambitious reform agenda to support access to finance, reduce NPLs, increase private sector participation in the banking sector, develop capital markets, strengthen the institutional and regulatory framework for the financial sector, and develop Ukraine’s sustainable finance and digital finance frameworks.
Ukraine’s corporate governance regulatory framework has improved substantially in recent years, but outstanding issues must be addressed to promote more transparent and fair markets, and to align with international standards. Ukraine has reformed its legal framework, including with the new Joint-Stock Company Law aimed at better aligning with EU and international standards. However, gaps remain in several areas. First, the disclosure of information remains limited under martial law, with few companies whose shares are traded on Ukrainian stock exchanges disclosing regular information on a voluntary basis. When mandatory compliance resumes after martial law, raising awareness amongst companies will be crucial together with the National Securities and Stock Market Commission’s (NSSMC) ability to monitor corporate governance practices. Second, there is no aggregated report to assess publicly traded companies’ compliance with Ukraine’s 2020 Corporate Governance Code, nor is there a designated body responsible for overseeing its implementation. Third, the high concentration of publicly traded companies’ ownership poses significant conflict of interest risks, and some important legal gaps remain, along with weak enforcement practices, particularly concerning related party transactions and insider trading. Lastly, strengthening the NSSMC’s capacity is key for post-war financial recovery. The NSSMC faces significant challenges in retaining qualified staff and securing sufficient funding due to the war. While recent legislation seeks to increase the NSSMC’s budget and strengthen political and operational independence, the practical implementation of these rules will be essential.
Ukraine’s public debt management function has exhibited strong resilience to the various operational challenges of wartime conditions, but there are still significant risks and challenges. Ukraine was able to borrow in the domestic market days after 24 February 2022, and has not cancelled or postponed any domestic debt operations since. Ukraine’s debt-to-GDP ratio has surged though from 51% in 2021 to above 90% in 2024 and is projected to peak at 108% in 2026. This poses a heightened risk of sovereign stress and puts pressure on the government’s fiscal space for reconstruction efforts and the promotion of longer term growth. Ukraine’s public debt is also now characterised by a relatively high share of foreign currency debt, accounting for 74% of the total as of end-September 2024, which increases currency risk. Refinancing risks also remains high, with large redemption peaks continuing into 2025 and 2026, while the maturity of domestic issuance remains relatively short. Ukraine has been gradually increasing the maturity of its domestic issuance since 24 February 2022, but its longest ‘on the run’ bond still only has a maturity of 3.5 years. Liquidity is limited in Ukraine’s domestic bond market, with a concentration of ownership in the banking sector which increases the risk of the sovereign-bank nexus. In terms of the debt and cash management function, the current institutional set-up has been viable during martial law but could be limited if Ukraine has to access more market based financing to support its recovery. Ukraine also faces significant operational risk, in particular ‘key person’ risk, owing to the frequency of issuance and wartime conditions. Lastly, rapidly growing explicit and implicit contingent liabilities could have a substantial impact on public debt sustainability. From a public debt management perspective, it is important to strengthen both the institutional and legal infrastructure around provision of public guarantees.
Financial consumer protection and financial literacy policies and frameworks remain essential to support a safe and informed use of financial services, to strengthen the financial resilience of Ukrainians in the face of wartime pressures and to contribute to their financial well-being in the longer term. In this context, Ukraine has made efforts to align its financial consumer protection framework with EU and relevant international standards, including recent legislative updates to strengthen financial consumer protection measures and enhance the powers of the National Bank of Ukraine and NSSMC. Some temporary measures are also in place during martial law, to protect vulnerable consumers including those directly impacted by the hostilities. However, some gaps remain, namely to improve the efficiency of out-of-court complaint handling and redress mechanisms, and to strengthen financial consumer protection measures in the field of consumer credit aimed at preventing aggressive lending practices and excessive indebtedness. Financial literacy levels also remain relatively low compared to the OECD average, with only a modest improvement between the last two assessments (in 2018 and 2021). To address this, Ukraine has developed a coordinated financial literacy framework, with a National Strategy for Financial Literacy Development until 2030 (NFLS) approved in 2024. Ukraine can further strengthen its financial literacy policies, by more actively involving private and not-for-profit stakeholders in the NFLS; developing guidelines to monitor and manage potential conflicts of interest; and improving impact assessment approaches of financial education initiatives.
Ukraine is working to introduce a mandatory public asset-backed pension system, which can contribute to improving retirement outcomes as well as the country’s long-term capital market and economic development. Currently, a public pay-as-you-go pension system and voluntary asset-backed pension schemes are in place. However, only around 5.2% of the labour force (as of end-2021) and 8.3% of pensioners under the mandatory pension system (as of July 2024) are members of a voluntary asset-backed pension scheme. These therefore play a minimal role in Ukraine’s financial system. A mandatory public asset-backed pension system will help to extend the coverage to a wider group of people, and work is already underway to develop the legal framework. A draft law “On Mandatory Accumulated Pension Security” has been recently proposed for consultation. However, successful reform will require political and social consensus as well as a long-term commitment by all key stakeholders.
