Inspired by the halcyon promise of a massive World Bank loan, Ukraine's government began moving last week to put its banking sector in order. The first order of business: rescuing the struggling, partially state-owned Bank Ukraina.
Close to one third of the $950 million loan package the World Bank agreed to grant Ukraine last week is earmarked for the financial sector, with $100 million of that directly connected to government divestiture of partial ownership in Bank Ukraina, Ukrsotsbank, and Prominvest-bank.
The odds are against the government unloading the largest of the three, Bank Ukraina, which by most accounts has become a massive liability for the government.
One of the oldest banks in Ukraine, Bank Ukraina's current capitalization is Hr 501.9 million ($161.9 million), according to a July estimate by the Association of Ukrainian Banks (AUB). Its debts, by comparison, are almost twice that.
The bank's problem lies in that its core business is financing Ukraine's woefully inefficient and over-regulated agriculture sector. The Ukrainian government is saddled by an estimated 1,300 state-owned agricultural institutions, and for the last four years it has used Bank Ukraina as its main conduit of funding to keep unprofitable collective farms afloat.
Advancing cash to Ukrainian farmers has been – to put it mildly – a poor business in Ukraine. Yet Bank Ukraina and other banks as well have been forced to do just that by the state, which not only makes the rules in the banking sector but also happens to be most banks' biggest customer.
'Bank Ukraina always was a half-government bank that serviced government programs, and it was forced to provide credits to agriculture,' parliament deputy Viktor Suslov told the Den newspaper.
The director of one Kyiv-based bank was even more blunt about how state banks do business.
'Either you do business with the government and loan them money at good rates when they need it, or the government will send its inspectors and close you down,' he told the Post on condition of anonymity.
For Bank Ukraina, the price of doing business that way has been high.
'The situation [at Bank Ukraina] is very serious,' Prime Minister Valery Pustovoitenko told reporters on Sept. 14. He estimated Bank Ukraina's outstanding agricultural debt at Hr 1 billion.
According to some local media reports, the situation at the bank is even worse. A Den report published last week said that Bank Ukraina's rural customers are Hr 2 billion to Hr 3 billion in debt. A May Ukrainian Business Review paints an even uglier picture, claiming non-performing loans equaled 32 percent of Bank Ukraina's total assets – Hr 3.28 billion as of February 1998.
Judging by the limited information available, profits are down significantly as well. In 1997, Bank Ukraina's annual profit was Hr 74 million ($38 million). For the first half of 1998, profit was Hr 1.3 million ($520,000), according to the AUB. The bank has been suspiciously silent about its profits of late, however.
'[Bank Ukraina] usually provides us information every month,' AUB spokesman Vladimir Rubenko said. 'But for the last two months they haven't.' Bank Ukraina spokesmen did not return Post phone calls.
An ongoing management shake-up also points to trouble. Bank Director Viktor Kravets stepped down from his post last week 'in connection with a transfer to another job,' according to a Bank Ukraina press release.
Industry insiders dispute that version of the story. 'He haggles with the government on terms of credit,' said the Kyiv bank director. 'The options he had now from the government simply were unacceptable, so he left.'
Meanwhile, the planned sale of a 12.7 percent stake in Bank Ukraina shares moves forward, albeit haphazardly.
Early this month Pustovoitenko ordered the State Property Fund to set a date for the Bank Ukraina share auction. Last week, the State Tax Administration ordered the sale halted, charging that Bank Ukraina owes millions in back taxes and unpaid social benefits to employees.
None of the seemingly intractable problems with the Ukrainian banking industry – highlighted by the Bank Ukraina mess – prevented the World Bank from doling out the first $100 million tranche of a $300 million loan to help Ukraine's financial sector. That may have been because the loan was based mainly on getting the laws passed to usher in that reform, which Ukraine did in fact do.
'In our opinion, they have met the conditions for the first tranche of the Financial Sector Adjustment Loan (FSAL),' Anzhela Prigozhina, the manager of the World Bank Ukraine's Financial Sector Reform Program, told the Post. 'Whether they get the second tranche depends on what they do in the future.'
What they must do is implement the laws they have passed – now something the Ukrainian government has a particularly good track record at doing. The main task is finding a buyer for their share of the state banks.
'I cannot believe that there will be any interest at all in shares of Bank Ukraina,' Wood&Company Kyiv Analyst Ivan Kompan said. 'Besides the very difficult situation the bank is in…the law makes foreign ownership of a Ukrainian bank extremely complicated.'
The World Bank says it is up to Ukraine. 'They can do it (meet World Bank conditions) in three days, they can do it in years,' Prigozhina said.
The World Bank has tentatively scheduled dissemination of the second tranche for December, 1998. Meanwhile, the State Property Fund has not set an auction date for the 12.7 percent stake in Bank Ukraina.
