You're reading: French bank’s letter to Yanukovych underscores high number of toxic loans in sector

An open letter from French bank BNP Paribas Group addressed to President Viktor Yanukovych underscored the banking industry’s ongoing headaches in getting loans repaid ever since a real-estate and lending bubble burst in 2008-2009 amid the global financial crisis.

Dated Jan. 15 and penned by Jean-Paul Sabet, head of the bank’s international retail banking arm and chairman of the supervisory board at the group’s Ukrainian subsidiary at UkrSibBank, it voices frustration over not being able to retrieve some $100 million from pro-presidential Party of Regions lawmakers Dmytro Svyatash and Vasyl Polyakov. 

The pair are the founders of car dealer and trader Avto Invest Stroi (AIS) and who, according to the letter, personally guaranteed a loan in 2007-2009 that is now worth nearly $100 million. 

Svyatash’s parliamentary office said he wouldn’t comment on the matter. Polyakov cited a busy scheduling for not being able to speak with the Kyiv Post. AIS failed to respond to a Kyiv Post inquiry. 

In particular, the letter refers to the two members of parliament as the “actual owners of the corporation AIS managing its current activities,” even though Svyatash sold his shares in the company in 2009. 

It furthermore accuses them of a “willful refusal to meet (loan) obligations.” 

It alleges they have evaded paying back the loan by “deliberately” starting “bankruptcy proceedings of debtor companies having transferred pledged assets through offshore structures to new companies.” 

The French financial institution says that AIS should have enough money to pay back the debt given its declared annual turnover of $800 million. Court decisions in Ukraine have recently invalidated the personal surety agreements that Polyakov and Svytash made on behalf of AIS-affiliated companies for the multi-million dollar debt. 

The desperate letter echoes a U.S. diplomatic cable that was sent from Kyiv to Washington, D.C. – in what is known as the Wikileaks cables – dated Oct. 15, 2009, that said “second-tier oligarchs and members of the Ukrainian parliament are extorting from the country’s banks and threatening bankers.” 

Former U.S. Ambassador to Ukraine William G. Taylor Jr. cited a high-level official of Austrian-owned Raiffeisen Aval who told him that one-third of the bank’s non-performing assets were deliberate non-payment of loans. The cable said that mini-oligarchs and well-known politicians along with their close relatives were “causing the biggest headaches in the industry.” 

The letter also comes a month after rating agency Standard & Poor’s released a banking industry country risk assessment (BICRA) on Ukraine that lists a “weak payment culture” as a major shortcoming. It classifies the banking sector in the highest risk category of 10 and states that a very high amount of “problem loans…continues to prevail in 2013.” 

Released in December, the BICRA report estimates that problem loans are around 40 percent of all loans. It moreover says it doesn’t expect a meaningful reduction in non-performing loans in the next two years because “loan growth remains sluggish and recoveries are lengthy.” 

Included in its definition of problem loans are overdue loans, restructured assets at altered terms, foreclosed real estate, and other assets recovered in loans workouts, and nonperforming assets sold to special-purpose vehicles. 

Last year the banking sector made a profit of $312 million, nearly twice less than in 2012, according to Serhiy Mamedov, executive director of the Independent Association of Banks. The S&P report estimates that 33 percent of the sector’s loan portfolio are foreign currency-denominated. 

A similar scandal erupted in September between Ukrsotsbank – owned by Italy’s UniCredit – and property developer ISA Prime Development. At the root of the conflict is a $190 million loan given to the company before the financial crisis hit 2008. When it did, ISA Prime stopped servicing the debt and allegedly tried to remove its pledged properties beyond the reach of the bank. 

In May 2011, corporate and investment bank Credit Agricole won a case against Frankfurt-listed TMM Ukraine, controlled by Yuri Tolmachev. The litigation involved roughly $800,000 in an outstanding loan facility involving the property developer. TMM had initiated the court proceedings in a bid to nullify the loan facility agreement. 

Kyiv Post editor Mark Rachkevych can be reached at [email protected].