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IMF hints at PrivatBank nationalization

The International Monetary Fund on Oct. 3 released its review of how Ukraine is progressing with the international lender’s reform plan.

The 150-page document, which came together with a $1 billion disbursement released last month, offers an in-depth chronicle of the country’s attempt to reconstitute itself in line with the IMF’s lending program, which could net Ukraine $17.5 billion in loans if the country meets all of the lender’s criteria.

The IMF suggests that PrivatBank – Ukraine’s biggest lender and only privately owned systemically important bank – could be nationalized, and that the Finance Ministry would then hire a “well-known international firm” to run the bank.

Privat, which processes 75 percent of all transactions in Ukraine and accounts for more than 20 percent of banking assets, is alleged to have serious problems with related-party lending in its loan portfolio, which, together with a lack of operating capital, has rendered it unstable.

In the report, the IMF expressed disappointment with Ukraine’s fight against corruption, noting that not a single high-ranking official has been convicted on corruption charges, and that the 2015 state budget received a total of just $4,000 in recovered assets from corruption cases.

In other areas, the Washington-based lender was more positive – the IMF complimented the Ukrainian government on its willingness to increase gas tariffs charged to the public by 425 percent since the start of the loan program. That reform has played well macro-economically, although it has infuriated large sections of the Ukrainian population.

But when it comes to achieving the structural reform of state-owned oil and gas companies, which continue to serve as cash cows for the country’s oligarchs, Ukraine is lagging behind schedule. The IMF report notes that the government has yet to approve the transfer of Naftogaz gas transmission assets to a new entity, a move that could significantly stunt corruption in the sector.

The $1 billion Ukraine received in September was $700 million less than the country was initially set to receive. The country has received a total of $7.6 billion since the current lending program began in March 2015.

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The International Monetary Fund has noted that has only recovered $4,000 in stolen assets – nowhere near the $20 billion or more allegedly stolen by ex-President Viktor Yanukovych’s regime.

Ukrnafta’s financial statements leaked

State-owned oil extractor Ukrnafta’s audited financial statements were leaked to a Ukrainian newspaper in early October, giving a new look at the state of the company’s internal finances.

The Ukrainian weekly Dzerkalo Tyzhnia published the company’s PwC-audited financial statements for 2014 and 2015. The documents reveal a total loss of $261 million in 2015, along with an additional $411 million in unpaid taxes.

“The statements also suggest Ukrnafta will not be able to continue as a going concern without a specific financial recovery program that would allow the cancelling of outstanding penalties for unpaid taxes, and recovering prepayments and debt for unpaid oil supplies,” wrote Denis Sakva, an analyst at Dragon Capital.

Ukrnafta owes total of Hr 12 billion ($460 million) to the state tax service.

Rescuing the company remains in the hands of its majority owner, Naftogaz, and its minority shareholder, the person who de facto controls the company – the oligarch Igor Kolomoisky.

Ukrnafta’s management has drawn up a restructuring plan for the company, but it needs to be approved by a meeting of the company’s shareholders. The minority shareholders have blocked the proposal over the course of two shareholder meetings.

State banks seek Hr 15.5 billion recapitalization

An estimated Hr 15.5 billion ($600 million) is needed to recapitalize state-owned Ukreximbank and Oschadbank, according to media reports.

Ukreximbank is seeking Hr 12 billion ($460 million) from the Ukrainian government for 2017 while Oschadbank would need an estimated Hr 3.5 billion ($140 million) to stay afloat.

The Ministry of Finance in January decided to recapitalize Ukreximbank with Hr 9.32 billion, increasing its registered capital to Hr 31 billion, while raising Oshchadbank’s registered capital by Hr 4.96 billion, to Hr 34.8 billion.

Dragon Capital analyst Anastasia Tuyukova said news of the banks requesting further state support was not surprising given the two banks as well as the National Bank of Ukraine made it clear that the Hr 14 billion received in the first quarter of 2016 was part of a three-year recapitalization program.

“Ukreximbank’s higher recapitalization needs suggest more significant asset quality deterioration in view of the bank’s higher share of F/X loans and a large customer base dependent on exports to Russia,” she said.

Tuyukova the company believed the next injection would be approved in the first quarter of 2017.

“Concurrently, the banks are required to proceed with corporate governance reform. According to the latest Ukraine-IMF memorandum, independent directors are to be appointed to the state banks by the end of January 2017, after parliament passes underlying legislation by the end of October 2016,” she said.