Ukraine’s banking system is at the mercy of one man and his bank - billionaire Ihor Kolomoisky and his Privatbank, the nation's largest. Experts say that if Kolomoisky so desired, he could implode Ukraine’s economy by destroying the bank, creating a "financial Chornobyl."
The bank has $11 billion in assets, making it the runaway leader in a banking system which is worth only $52.8 billion. This gives Kolomoisky 21 percent of the market.
A recent deal between Privatbank and the National Bank of Ukraine means the bank is relieved of a requirement to raise new capital as it continues to receive state support. But keeping the bank alive in the short run fails to address questions of its long-term viability.
Issuing roughly half of the country’s credit cards and serving as a deposit bank for one in three Ukrainians, Privatbank has a huge corporate and other loan portfolio allegedly infected with at least 70 percent related-party lending, likely to other Kolomoisky businesses.
Privatbank’s press service denied that 70 percent of its loan portfolio was to connected parties, and said in a statement that the bank is “fully transparent” in its lending.
Experts say that the bank will eventually have to be split up and partly nationalized in order to solve the double-headed problem of its instability and market dominance.
If that happens, the next question will be: will the state or Kolomoisky take on the bank’s most troublesome portions?
Privat CEO Oleksandr Dubilet refused to be interviewed for this story. When asked at a public conference if an agreement over the bank’s future had been struck, Dubilet refused to answer.
Kolomoisky has publicly denied that he uses the bank’s size as a blunt political instrument, instead calling it the “holy cow” of his business empire – one that is too sacred to be touched. He could not be reached for a Kyiv Post interview.
Power of No. 1
Kolomoisky founded Privatbank in 1992 with his Dnipropetrovsk business partner, Hennadiy Boholyubov.
At first, the business thrived on transferring money between Ukraine and Russia. But over the years, Privat has grown to become Ukraine’s largest deposit bank, holding 21 percent of the public’s bank deposits.
Privatbank has invested in speedy customer service and an aggressive PR team that creates the appearance of an open, Western-style bank. To that end, it has repeatedly won awards from Western finance trade publications as “best bank in Ukraine.”
But the bank’s dominance grants its owners immense political leverage. According to Oleksandr Savchenko, a former deputy head of the National Bank of Ukraine and current rector of Ukraine’s International Business School, Kolomoisky could destroy Privat “in 30 seconds” by simply defaulting on his obligations.
Privat’s destruction could cause a panic that results in its clients making withdrawals en masse.
“The banking system of Ukraine would stop,” Savchenko said, and it would likely precipitate a drop in gross domestic product.
What’s worse is that many of its depositors may be ineligible to receive anything from the Deposit Guarantee Fund, at least those who invested in a service that Privatbank calls “Profitable Investments.” According to a bank press representative, the service has accepted Hr 2 billion in deposits.
Promising 24 percent annual return on deposits, the service is not insured by the government since it is not a direct bank deposit. The bank offers insurance through Ingosstrakh – a Privat Group member that, according to the bank’s press service, has bank accounts in Privatbank. A similar service, offered by Bank Mikhailivsky and also privately insured by a company affiliated with its owner, led to more than Hr 1 billion ($44 million) in uninsured losses among Ukrainian depositors after the bank collapsed.
‘Blackmailing entire state’
According to Oleh Lavryk, a lawmaker with the Samopomich Party who serves on parliament’s finance committee, the state would have no ability to cover Privat’s eligible deposits in the event of a bank run.
“With one decision, the leadership of Privat Bank could influence the financial system,” Lavryk said.
Under both ousted President Viktor Yanukovych and current President Petro Poroshenko, Kolomoisky has used Privatbank as a political tool, threatening to bring it to collapse, said political analyst Vitaliy Bala.
The bank also comes in handy for leveraging concessions for his other business interests, including Ukraine International Airlines and Ukrnafta, the state oil producer.
Viktoriya Voytsitska, another Samopomich lawmaker, said that “by throwing the bank into bankruptcy, it would cause a major collapse of the entire banking system.”
“It’s blackmailing the entire state,” Voytsitska added.
“The NBU and Privat understand this, so Privat has not had problems with receiving refinancing or with the recent extension of the term of returning refinancing for a few years,” said Oleksandr Zholud, an expert at the Center for Economic Strategy, a think tank.
Art of the deal
Disregarding blackmail allegations, there are indications that Privatbank itself is unstable.
According to Ruslan Chornyy, an analyst at Financial Club, an independent banking market research firm, 70 percent of the bank’s loans are connected to Privat Group – a massive instance of related-party lending which could result in non-performing loans.
It is unclear how badly the bank has been afflicted by the wave of NPLs that has hit the rest of Ukraine’s banking sector.
CEO Dubilet claimed in a February 2016 interview with Bin.ua that roughly 10 percent of the bank’s loan portfolio is “problematic” – the general figure for the whole banking system is more than 24 percent. But another source told the Kyiv Post that as much as 60 percent of the bank’s lending portfolio is non-performing.
Lavryk, the Samopomich lawmaker said, “the bank is constantly being refinanced.”
The combination of NPLs and related-party lending has likely gnawed away Privatbank’s capital base, leaving it in desperate need of external cash.
Lavryk added that other banks which failed to raise their own capital have been shut down, while Privat’s systemic importance allowed it to persist.
“It’s a threat to the financial stability of the country,” Lavryk added.
Privatbank has 20 percent of the nation’s banking assets. If it has the same problems with non-performing loans and insider lending as other banks, the banking system is in big trouble. But the central bank has entered into a refinancing agreement with billionaire owner Igor Kolomoisky.
Owes state $1 billion
The NBU has already doled out refinancing loans to Privatbank since 2014 with Privat-owned airplanes serving as collateral. The loans have left it Hr 30.5 billion (more than $1 billion) in debt to the state. Privatbank said that it has returned Hr 8.1 billion ($3.2 million) of the loan.
All of this has left Privatbank with a capitalization problem – how can the bank be funded so that it can continue to exist, thereby ensuring the survival of Ukraine’s economy?
National Bank of Ukraine Governor Valeria Gontareva and Kolomoisky have reportedly argued over how much the Dnipro billionaire should put up to fund the bank.
“The problem is that one day she talks about Hr 128 billion and then the next she says, no, it’s Hr 15 billion,” Kolomoisky told Politico Europe in December. “And today she has her tongue stuck up her ass, because she doesn’t know what to say next.”
The bank’s refinancing has attracted allegations of misconduct. Sergii Leshchenko, a lawmaker from Bloc President Petro Poroshenko, alleged in a May 12 Facebook post that “when Stepan Kubiv was leading the NBU, Kolomoisky’s bank received undisclosed billions in stabilizing loans. The time came to pay it back, but Kolomoisky made a deal for another postponement.”
Tension between the bank and the government came to a head in the spring of this year.
Avoiding regulation
Ukraine’s notoriously political anti-monopoly committee sued Privatbank on Feb. 25, saying that it had refused to hand over information pursuant to a subpoena. That case ended in an Hr 247,000 fine in April.
On May 23, Finance Minister Oleksandr Danylyuk, speaking live on Ukrainian television, accused Privat of having systemic problems. “They use all possible means to avoid regulation,” Danilyuk said.
But at the beginning of June, signals that a deal had been reached began to appear.
“No threat to the existence of Privatbank exists,” Poroshenko said at a June 3 press conference, adding that he had met with Kolomoisky on the matter.
On June 7, Privatbank CEO Dubilet said “the capitalization issue is resolved,” in a statement to Ukrainian journalists, adding that the bank was not being required to increase capital, essentially deferring the bank’s root problem.
Asked about details of the deal at a press conference related to peer-to-peer lending the same day, Dubilet demurred.
“I can only comment on the presentation,” he said.
Privat parts
There are many potential solutions for Privatbank, including a breakup by divisions – corporate, retail and investment – or nationalization.
Savchenko said that splitting it up and imposing a cap on assets could solve the problem.
“To solve the problem of PrivatBank, you have to offer the owner to split the bank into two parts, a retail bank and a corporate bank, and to sell a part of it for profit,” Savchenko said.
Vitaliy Vavryschuk, director of financial stability at the National Bank of Ukraine, told the Kyiv Post that establishing “systemic capital requirements” that would diversify the market is in the NBU’s pipeline, but that it would happen in 2019 at the earliest.
Others say that while splitting up the bank among numerous private owners might be the best option, it is also the least likely due to Kolomoisky’s political sway and savvy.
“The problem will not be solved this year, but it must be solved,” said Ruslan Chornyy, the finance analyst. “We can expect a partial nationalization.”
Chornyy added that the bank would have to be nationalized at some point because “the bank’s main shareholders do not want to (repay) state loans.”
“Their shares would remain with the bank,” Chornyy said, adding that the Ukrainian state might find itself nationalizing the unprofitable portions of the bank.
The bank itself refuted this allegation, saying that it needs “neither help nor guarantees from the government.”
Kolomoisky, when asked how to rate the work of the National Bank of Ukraine during an impromptu encounter with a reporter from Ukrainian news website Ukrainska Pravda, called it “excellent.”
“Valeria Alekseyevna (Gontareva) is cleaning the market for us,” he added.
