You're reading: Yanukovych spooks market by inking law

Despite unprecedented protests by Ukrainian traders, President Viktor Yanukovych signed a controversial law that essentially nationalizes the country’s main depository, giving bureaucrats a glimpse into the records of all local securities market transactions.

The so-called depository law, which some say could doom the weak local capital market, is the latest in a series of rushed laws taking advantage of the final days of a rubber stamp parliament to secure various interests, experts say.

According to parliament’s website, Yanukovych signed the law on Sept. 24. It remains unclear what the final version looks like. The bill was repeatedly changed at various points throughout the legislative process. The version from the second reading reappearred on parliament’s website on Oct. 4 after having disappeared for 10 days.

The law proposes to create a national Central Securities Depository that would gain control over essential functions of the country’s financial market. It proposes to create the new entity on the basis of the National Depository of Ukraine, a state-run institution which currently covers 10 percent of the market. It will absorb the All Ukrainian Securities Depository, majority owned by market participants. A similar process will take place for the country’s clearing system.

Simply put, both functions – clearing and depository – are used to authorize any trade on the market, record transfers of ownership and ensure payments are made. Critics say the proposed system will be inefficient and could open the door to massive abuse.

The purpose of the law is to create a single structure that would consolidate Ukraine’s low volume of operations, thus lowering the costs, argues the Independent Association of the Banks of Ukraine, a supporter of the law.

But most market participants and analysts disagree.

“The AUSD, by all objective criteria, appears to be stronger technically, institutionally and even financially, despite the fact the NDU is owned by the government. The way we saw the story of NDU was: inefficient use of government funding, government equity; nontransparent management, nontransparent ownership, and quite a bit of private capture of a state institution,” Marius Vismantus, World Bank expert, told the Kyiv Post earlier this year.

“The new law will have an extremely negative impact on the investment attractiveness of Ukraine,” said Artemiy Yershov, managing director in Ukraine for Troika Dialog. “The law, in effect, establishes a monopoly on clearing and settlement services for securities transactions, thereby eliminating competition between clearing organizations, providing a platform for the dissemination of bureaucracy and corruption in the clearing services market.”

Among the law’s failures experts note: a lack of specifics as to how the new entities will be created, no planned audits of the AUSD and NDU by an independent international audit firm to assess their market value, and ignoring the interests of current shareholders.

Plans to privatize the depository after essentially nationalizing it have also raised eyebrows. In the initial version of the law, a 50 plus one percent stake of the new depository would be owned by the national bank, but sold within three years, right around the 2015 presidential elections. Potential buyers include issuers and individuals. This uncommon solution is all the more worrying in Ukraine, where oligarchs already exert too much influence on business and politics.

Market participants who spoke to the Kyiv Post on condition of anonymity for fear of reprisals said they worried the new system could lead to abuse. In particular, they noted the critical nature of technical depository and clearing functions means the new system could be used to pressure companies by creating administrative hurdles. Moreover, the depository would keep records of all trades and transfers, which could then be abused given Ukraine’s notoriously corrupt justice system.

“This information only has value to those who have ill intentions. Unfortunately, Ukraine is not immune from those kinds of intentions and from people who would be able to use that information for ill purposes if they got it. Raider attacks and companies being taken over by outsiders give unfortunate examples that problems still exist,” Vismantus said.

Legislative race

The depository law is not the only one to be rushed through parliament in recent weeks and months. Other controversial bills include: a law on state procurement that would move public purchases into the shadows; a law on the national electronic payment system and multiple tax reform proposals.

“The government is in a hurry because they realize that the future parliament will not be the rubber stamp institution it is now,” said Igor Presniakov, political analyst at the Ukrainian Institute of Public Policy. Given that half of seats will come from single mandate districts, the next batch of parliamentarians will be more independent, he said, and will demand bigger trade-offs or bribes for their votes.

Laws passed now will also be secure, Presniakov said, as an opposition government would have to overcome a presidential veto to pass legislation canceling the current laws. But bills passed only in the first reading, will have to be re-submitted, he added.

The pro-presidential coalition is now – with its majority – rushing through any legislation that could be blocked by an opposition parliament, said Valery Chaly, deputy director of the Razumkov Center think tank. “They are expecting to lose,” he said.

Most of the legislation being passed “is about the money,” Chaly added. He pointed to a law on biometric passports lobbied by EDAPS, a document producing company, as an example.
“It’s mainly about people who have lobbied something for a long time and now realize it’s their last chance,” Presniakov said.

Others see the hand of Yanukovych’s allies in the recent measures.

“The national bank is controlled by the ‘family,’ through the friend of (the president’s son) Oleksandr Yanukovych (Serhiy Arbuzov), so it would be natural that they try to monopolize (the depository system),” said Anders Aslund, economist at the Peterson Institute in the U.S. He described the growing control of Yanukovych allies over key economic sectors as the signs of a “predatory regime.”

The central bank did not respond to repeated Kyiv Post inquiries.

Game over

For Ukraine’s already badly damaged stock market this could be a final nail in the coffin. The main UX index lost two thirds of its value over the past 18 months, falling from 2,900 points to less than 950. Since mid-September it lost 13 percent.

Dismal liquidity, a lack of solid issuers and listings abroad are emptying the local market. On Sept. 28, investment bank Renaissance Capital, once one of the biggest players with almost half of local turnover in 2006, canceled its Ukrainian license for trading and holding securities. Several days earlier, fellow Russian bank Alfa Bank officially closed its local trading operation.

Hoping to convince Yanukovych to veto the bill, market participants staged a historic strike on Sept. 20, refraining from any activity during the market’s opening hour. Igor Mazepa, head of investment bank Concorde Capital, then told journalists: “This is a very dangerous precedent, a very dangerous law. It will make the work of the capital markets simply impossible.”

Managing director of Univer, Olexiy Sukhorukov, said such a suspension of trading “has never happened anywhere in the world,” adding the law could mean “the end to the stock market.”

Noting that a single settlement center does not have the technical capacities to serve all the exchanges, Troika Dialog’s Yershov said: “There will be no trust from investors and market participants. All of this … complicates working conditions for local and foreign investors, and, as a result, will send domestic capital abroad.”

Kyiv Post editor Jakub Parusinski can be reached at [email protected].