Ukraine will soon choose its sixth president, and polls indicate it will almost certainly be comedian-turned-politician Volodymyr Zelenskiy.
Although he has no previous background in politics, economics or national financial decision-making, Zelenskiy will most likely be one of the few people calling the shots in these spheres for the nation of 42-million people starting next month.
Many questions remain to be answered about how Zelenskiy and his team will handle Ukraine’s financial system, what changes to expect in the banking sector and what the worst-case scenario could be.
Recent journalistic investigations pointing to the candidate’s business links to Ihor Kolomoisky, a billionaire Ukrainian oligarch who currently manages his huge Ukrainian business empire from Israel, have added even more questions.
Banking sector and PrivatBank
The major risk in the banking sector if Zelenskiy becomes president is connected to PrivatBank, Ukraine’s largest state-owned bank, according to Oleksii Kushch, an economist and financial analyst from Optima Analytical Center, a think tank.
Previously owned by Kolomoisky and his business partner, PrivatBank was nationalized in December 2016. It currently has $6.3 billion in deposits from the public. Its financial health is critical for the stability of the banking sector as a whole.
“Any wrong move made by the authorities, any negative news could trigger a panic and outflow of deposits,” said Kushch.
Kolomoisky wants the bank back, and has been fighting for it in court. He has already had some success: On April 18, the Kyiv District Administrative Court ruled that the nationalization of PrivatBank was illegal.
According to Kushch, this is an extremely dangerous situation that could spiral out of control, then lead to panic and the withdrawal of deposits. If that happens, the government will have two options to respond – neither of them good.
“The state could cover the outflow of deposits by printing money, or it could introduce a moratorium on the return of deposits for millions of depositors. It could cause huge social unrest,” said Kushch.
If the Court of Appeals confirms that PrivatBank’s nationalization was illegal, and an appeal by the National Bank of Ukraine fails, Kolomoisky’s hands will be untied.
Moreover, according to experts, PrivatBank is just a key to opening up more wins for Kolomoisky.
The bank itself is not so necessary for the former owners, Kolomoisky and oligarch Gennadiy Boholyubov. Rather, their main goal is to halt legal proceedings against them, ensure the safety of their businesses in Ukraine, and to unfreeze their assets, which are currently under arrest globally.
“Most likely, Kolomoisky will manage to get all of the criminal cases against him closed and all of the lawsuits withdrawn from the courts,” said Ruslan Chornyi, a managing partner at finance company Financial Club.
However, any court rulings could trigger a massive outflow of deposits from PrivatBank and a crisis in the state banking sector (the state controls 60 percent of the country’s banking sector), which could provoke a systemic crisis, according to Kushch.
At the same time, other experts believe there is little chance that PrivatBank will be handed back to Kolomoisky, as this would swiftly draw a negative response from the International Monetary Fund and other international donors.
“This will be a deal breaker. Zelenskiy has zero room to maneuver on this point,” said Timothy Ash, London-based Ukraine analyst.
Alexander Paraschiy, research director at investment firm Concorde Capital, said that PrivatBank will be under state ownership until at least 2021, after which the government may try to privatize it.
“I believe that the chance that (the bank) will be returned to Kolomoisky is insignificant, as is the chance that he’ll get compensation for his shares in the bank,” said Paraschiy.
In general, the banking sector will most likely slow its activity as it waits to see what will happen next. According to Chornyi, bankers are not inclined to panic and make abrupt moves, but some clear changes already can be predicted.
“They will definitely cease lending, because it is unknown what will happen tomorrow,” said Chornyi.
NBU and International Financial Organizations
In the worst case scenario, the Zelenskiy administration could alter the leadership of the National Bank of Ukraine, or NBU. If unprofessional individuals take the helm of the bank, they could simply start printing money, according to Chornyi.
“This is a realistic possibility, because of what Zelenskiy says and how far it is from reality. It’s just a game in front of the public, and has nothing to do with a real economic policy,” he said.
However, Kushch said that Zelenskiy would not find it easy to oust the current head of the NBU.
“As practice shows, to remove the head of the NBU, one needs to have the maximum concentration of political power. It’s even harder than nominating one’s own prime minister,” said Kushch.
According to financial analyst Ash, any decision to remove Yakiv Smoliy, the current head of the NBU, would mean the end of the IMF program and any donor support.
At the same time, Zelenskiy, as president of Ukraine, will have to continue dialogue with the IMF, the World Bank and other international financial organizations, as Ukraine is in a difficult financial situation. It must repay debts of almost $17 billion over the next few years, Kushch said.
“If the president is Zelenskiy, the fate of the cooperation program with the IMF is still not clear,” Kushch said. “We have not seen his official position yet. Plus, no one knows his personal ability to negotiate and overcome the resistance of parliament to fulfilling the promises that Ukraine has given to the IMF.”
