The government takeover of PrivatBank will cost Ukrainian taxpayers billions of dollars while those who bankrupted the nation’s largest bank are likely to go free.
PrivatBank, which had 20 percent of the nation’s $53 billion in banking assets by some valuations, was nationalized on Dec. 18. It now belongs to the Ministry of Finance.
According to Vitaly Vavryshchuk, head of the National Bank of Ukraine’s financial stability department, there was no other choice but nationalization because “the safety of clients’ money should not depend on repayment of loans given to related parties.”
Former owners Ihor Kolomoisky and Gennadiy Boholyubov are alleged to have siphoned out Hr 148 billion ($5.6 billion) in insider loans, leading to the bank’s collapse.
Losses of such size would push the overall taxpayer cost of Ukraine’s banking disaster of the past decade to more than $20 billion, most of which is unrecovered and most of which amounted to unprosecuted bank fraud, the central bank said.
Oleksandr Savchenko, a former NBU official and rector of the International Institute of Business, said that there is “no difference” between mass insider lending and embezzlement, adding that “knowing the history of PrivatBank, I don’t believe that they will be returning anything.”
NBU officials, however, say that they will force Kolomoisky into a debt restructuring plan to repay debts – even though the central bank’s had little success in doing this with other owners of failed banks.
Former PrivatBank officials deny that the bank was suffering from anything close to the Hr 148 billion ($5.6 billion) cited by the NBU.
In a column published in Ukrainska Pravda, they argue that the NBU “changed the rules of the game” so that the vast majority of PrivatBank’s collateral no longer covered the loans and to label a higher percentage of the bank’s credit portfolio as insider lending than what reflected reality. The bank’s former management also argued that the IMF had been fooled by an NBU that “manipulated data” out of a directed campaign to nationalize the bank.
The NBU is hiring an independent, foreign auditor to analyze the bank. The results, which are expected to be announced in coming months, will be posted online.
The nationalization of PrivatBank means that state-owned banks now control more than 50 percent of assets in the Ukrainian banking sector.
Birth of a bank
Kolomoisky founded the bank with business partner Gennadiy Boholyubov and former Economics Minister Sergiy Tigipko in 1992.
The bank initially started by servicing payments between Ukraine and Russia, but through an aggressive marketing strategy, it turned into the country’s biggest private bank.
Ihor Olekhov, an attorney at Baker McKenzie’s Kyiv office, said that the bank had been “very aggressive for the past 10 years in penetrating every corner of the market.”
By 2016, PrivatBank grew to control one-third of all deposits in the country, with 20 million depositors –roughly half of Ukraine’s population.
But according to NBU statements, the bank’s owners had used it for mass insider lending. Gontareva said at a Dec. 19 conference that 97 percent of PrivatBank’s loan portfolio had gone to insiders – $5.6 billion.
Big four auditor Pwc also signed off on PrivatBank’s books for years before this. The company did not reply to a request for comment.
The day following nationalization, the bank was teetering on the edge of collapse. Outgoing PrivatBank CEO Oleksandr Dubilet said at a Dec. 19 press conference in Dnipro that the bank was undergoing daily withdrawals of Hr 2 billion ($76.1 million).
Later that day, the NBU provided PrivatBank with a refinancing loan of Hr 15 billion ($570.8 million).
Kateryna Rozhkova, a deputy central bank governor, said that the loan left PrivatBank’s core account with Hr 15.2 billion ($578.4 million) – suggesting that the country’s largest bank had Hr 200 million ($7.6 million) before the government intervened.
To stop outflow of money, President Petro Poroshenko introduced legislation providing for state guarantees of deposits exceeding the existing Hr 200,000. After the law passed, PrivatBank reported about $3.1 million new deposits.
Let’s make a deal
Kolomoisky and the government have a July 1 deadline by which they must agree on how to restructure PrivatBank’s insider loan portfolio.
“There are basically two key compromises,” said Vavryshchuk. “First one is smooth transition, to state ownership and the second one is restructuring of all related party loans over the next six months.”
Vavryshchuk added that the “new Privat management will be driving this process” of negotiating the restructuring. So far, former Finance Minister Oleksandr Shlapak has been named as the bank’s new CEO, while other positions on the bank’s board are still being determined.
Former NBU official Savchenko said that a deal on the restructuring would likely be reached over the next month or so, but that Kolomoisky had “won” in getting the state to assum his debts.
If the government attempts to seize related-party PrivatBank collateral, it will likely only be seizing more debts, Savchenko argued.
“Nationalizing enterprises that PrivatBank used as collateral will probably mean nationalizing even more debt,” he said.
International organizations have praised the takeover, with IMF managing director Christine Lagarde calling it “an important step…to safeguard financial stability.”
PrivatBank sent signals of instability long before it was called insolvent.
On April 1. 2015, the bank had an Hr 113 billion ($4.3 billion) deficit and needed recapitalization, Gontareva said at the briefing on Dec. 19.
As the bank continued to fail, Gontareva said, the deficit deepened to Hr 148 billion ($5.6 billion) over the following 20 months.
According to Oleksandr Zavadetsky, former head of the NBU related party loan monitoring department, the NBU knew of the extent of the insider lending problem since at least December 2015.
As the deficit increased, the bank was refinanced with Hr 11 billion ($420 million) by the NBU to support the bank’s liquidity in 2014, with an overall amount of Hr 30.5 billion ($1.1 billion).
The Kyiv-based watchdog Anti-Corruption Action Center claimed that instead of stabilization, Hr 21 billion ($1.8 billion) was withdrawn abroad through offshores, again taking out inside loans.
“In our opinion, there are signs of criminal offenses including fraud and embezzlement,” Daria Kaleniuk, head of the Anti-Corruption Action Center, said. “We can only guess how many similar cases are in this bank.”
She adds that prospects of assets recovery from PrivatBank are “poor and deplorable.” The General Prosecutor’s Office and police were aware about the money laundering two years ago, but the investigation is still ongoing.
“It is one particular collapsing case – it plunges as Prosecutor General’s Office delays it,” Vitaliy Shabunin, head of the board of directors of the Anti-Corruption Action Center, told the Kyiv Post. The General Prosecutor’s Office did not reply to a request for comment.
Shabunin said that taxpayers will pay twice for the state’s failure to investigate bank robbery.
“We paid taxes, the state didn’t do its job, but now we pay again for their inactivity,” he said.
Kalenyuk added that asset recovery should be raised to the level of national security.
“Unfortunately, 88 banks went bankrupt in two years and neither the President nor the (prosecutors) nor the government had any desire to put this issue on the level of security and make it a priority,” she said.
Privat24 online system
Although the Ministry of Finance owns a 100 percent stake in PrivatBank, the online banking system Privat24 might be out of state control. As of now, the system operates without restrictions.
“We won’t have any full clarity about ownership of this IT system until we do legal due diligence on the bank,” Vavryshchuk said about Privat24. “It’s going to start very soon, and until we get a final report from the auditor we will be able to make a firm statement about who is the owner of the system.”
Ex-head of e-business in PrivatBank Oleksandr Vityaz said in an interview to IT media Ain.ua that the system doesn’t belong to PrivatBank. All the processes inside the system run on a platform called Corezoid, which belongs to an American company apparently funded and set up by PrivatBank employees in 2013. Vityaz said that the processes PrivatBank uses belong to the bank, but that the system itself belongs to Corezoid.
Corezoid, with a Silicon valley office, is owned by the Delaware-registered Middleware Inc. That company’s real owner could not be determined.
Gontareva suggested the use of other online platforms, adding that there is no difference between them.
The ex-COO of Lviv IT company Anna Golovchenko disagreed, saying that her company changed from OTP bank to PrivatBank because of the service, calling it “one of the best online systems in the world.”
Clients can use the system to open deposit accounts, get bank statements in three languages, submit a tax declaration, and pay bills – all “with one click.” “No need to go anywhere – all transactions are conducted online,” she said.
The plan is to bring in an international management firm after the audit. That company will work to turn PrivatBank into a commercially viable business, open for sale to a foreign investor.
Gontareva estimated that this could take three years.
Tymofiy Mylovanov, co-founder of VoxUkraine and NBU council member, said that preparing the bank for sale would require “much work,” but that it would have a long-term “positive effect on the market.”
“It is a politically difficult decision, it is unpopular, but it is necessary,” Mylovanov said about the takeover. “That they are willing to resolve the problem in fact gives me a bit of hope that we are being governed by the people who can make tough decisions.”
Anastasia Tuyukova, an analyst at Dragon Capital, said the main risk for reselling is “inefficiency.”
“They could lose market share, then finally when they decide to privatize, there will be nothing to sell,” she said.
Savchenko said he expected the bank to become a second Oschadbank – state-owned and huge, but hemorrhaging several hundreds of millions dollars a year.
“All our state banks generate losses,” Savchenko said. “Privat will generate losses of up to 30 – 50 billion ($1.1 – 1.9 billion) each year.”
But if a foreign team takes over the bank, he added, the outcome could be better.
Vavryshchuk, the NBU official, said that it would take “ at lest a couple of years to normalize the function of the bank and to redefine its business model and then get everything prepared for the bank sale.”
“It’s not going to happen faster,” he added.