For nearly a quarter of a century, owning banks in Ukraine meant being able to steal billions of dollars from depositors with impunity.
But ever since the National Bank of Ukraine undertook a cleanup of the banking sector that saw the regulator yank 88 out of 190 banks off the market, there’s a real chance that the party is over.
Banks are flush with liquidity, at about Hr 19.8 billion ($756.9 million) system-wide. But the larger lenders remain timid about opening new lines of credit, given the lack of law enforcement institutions that would allow them to enforce a loan agreement.
Steven Fisher, CEO of Citibank Ukraine and member of the board of directors of the American Chamber of Commerce in Ukraine, said that a key to faster recovery could be the long-awaited creation of an agricultural land market, a step that remains controversial among lawmakers.
“If there’s land reform and farmland ownership could be reinstituted, that could result ultimately in a significant re-expansion of lending to the agricultural sector,” said Fisher said. “We need to do this to break out of this 2 to 3 percent GDP growth range, which frankly for Ukraine, is not enough.”
Fisher added that “matching investments” in logistics and infrastructure would have to happen simultaneously for Ukraine to achieve its agricultural potential.
“Will this be matched by investment in the rail sector? By matching investments in dredging and expanding ports? In river transportation?” he asked. “Billions and billions of dollars are needed to invest in Ukraine’s transportation infrastructure in order to support a significant growth of exports from where we are now.”
But the country still lacks an independent judiciary that can effectively decide loan disputes, as well as law enforcement that could prevent and prosecute mass embezzlement. And though the government has promised initiatives, Fisher said that failure on this would likely stop international lenders from continuing to support the country.
“If you don’t do these things, you’re not going to get the money you need to break out of the 2 to 3 percent range,” he said.
Gontareva’s tenure ends
In May, National Bank of Ukraine Governor ValerIa Gontareva resigned after three years as head of the central bank. Gontareva’s departure came five months after the nationalization of PrivatBank, with the outgoing banker announcing during her resignation speech that “reforms are complete.”
If so, it came at a huge cost: $20 billion in taxpayer losses, including money paid out to cover insured deposits, recapitalization loans from the central bank that were never repaid, and uninsured deposits in the banks that simply disappeared when banks went under.
The biggest single loss came from the biggest bank — PrivatBank — which alone could cost taxpayers $5.6 billion. Much of the losses in the banking sector, with assets estimated at a combined $50 billion or so, came because of fraud or insider lending, Gontareva said.
But, according to Fisher and many other observers, reforms are not complete.
“They eliminated virtually all of the criminal banks, the money laundering banks, the weak banks, which was not an easy job at all, but they did it,” Fisher said, noting approvingly that 40 banks now hold around 92 percent of the assets in the financial sector.
“But for the whole country, there’s a lot more that needs to be done. A lot was done, but a hell of a lot still needs to be done,” he said.
The government has not yet named a successor to Gontareva, but has rather opted to keep her chief deputy, Yakiv Smolii, as acting governor since May. However, Ukrainian law stipulates that an acting governor can only remain in place for two months before being replaced by a permanent choice.
A favorite candidate among Western business and international lenders is Raiffeisen-Aval’s Volodymyr Lavrenchuk, who told the Kyiv Post in April that he would be open to the job. The Presidential Administration floated his potential appointment before declining to name anyone to the position.
“Governance and NBU supervision are very key to continuing (reforms),” Fisher said, adding that he favors a technocrat over a politician for the job.
After leaving 102 banks on the market, the NBU now faces the last stage of its cleanup, in which dozens of small banks are expected to close.
“With these small banks, there’s a governance challenge. They have to be transparent,” Fisher said. “No bank can be putting the system at risk by creating more consumer losses.”
PrivatBank
It’s six months since the Ukrainian government took over PrivatBank, overseen by the Ministry of Finance. Now the nation’s three largest banks are state-owned, including UkrExImBank and Oschadbank, meaning that 53 percent of the banking sector belongs to the government.
At the time of the bank’s nationalization, the government promised to make public by April an EY audit of the last two years of the bank’s existence.
The audit is complete — Gontareva cited figures from it before her resignation — but it has not yet been made public. An NBU spokeswoman said that legally, the responsibility for publishing the audit lies with the bank’s new management — the Ministry of Finance — and that the central bank “hopes the bank will satisfy the legal requirement of publishing the audit by the end of May.”
It’s now June, and no audit has been released.
“It’s better to do the job right, and if it’s delayed another month, then fine,” Fisher said. “But you don’t want to have a situation where something as sensitive and strategic as that goes wrong.”
Fisher wasn’t bothered that it took so long for Ukraine’s government to nationalize PrivatBank, even though the extent of insider lending and non-performing loans were known on the market and within the central bank itself for more than a year before the state takeover.
“For anything of that scale and impact, you have to manage it very carefully,” he said. “Just think about the human aspect of it — who is gonna manage this bank? You don’t want to do it incorrectly and foment a run on the banks and a challenge to system reliability.”
Restarting lending
With the systemic threat that PrivatBank posed somewhat neutralized, the banking system appears ready to start inching its way towards the risk of extending loans again.
“If you’ve got foreign direct investment coming in — then, who’s investing? They’re all my customers,” Fisher said. “Every bank has a very vested interest in coming in and supporting this.”
Fisher went on to praise the NBU’s policy of lowering interest rates, saying that they could help attract FDI to the country. As of writing, the rate was 12.5 percent, after a May 25 cut. The NBU started the year with a 14 percent rate.
“When people wake up and realize that interest rates are lower, credit quality is higher, you’ll see an increase in lending to support the investment activity,” he said.
Fisher added that issues surrounding “rule of law and protection of creditors’ rights under law” are still a cause “a lot of concern” among the banking community.
But, overall, the message from the head of Citibank, one of Ukraine’s most profitable banks, was positive:
“We’re here to stay,” he said.
