A drab office block in outer London is home to five firms that hold hundreds of millions of euros in undeclared bank accounts in Ukraine’s largest bank, PrivatBank, bne IntelliNews can reveal.
According to the asset book of PrivatBank, which has been leaked to bne IntelliNews, a handful of these limited liability partnerships (LLPs) registered in the London suburb of Enfield hold deposits totalling just over UAH9bn (€320mn), which equals 22.5% of total PrivatBank corporate deposits worth UAH40bn.
But the British tax authorities will see nothing of this wealth: on December 1, the firms filed their accounts for the financial year ending February 29, 2016, and declared cash assets totalling only £1.3mn. The LLPs all claim ‘small company’ status in the UK, allowing them to file accounts without any independent audit.
The five LLPs registered at The Business Centre on Great Cambridge Road – Lumil Investments, Sunnex Investments, Berlini Commercial, Sofinam Investments and Camerin Investments – were all registered on February 20, 2012. They are owned by offshores registered in tax havens.
PrivatBank declined to comment on whether the UK LLPs firms are controlled by shareholders of the bank, who include Ukrainian oligarchs Ihor Kolomoiskyi and Hennadii Boholiubov.
Nick Antoniou of NA Associates, who filed the accounts for the LLPs, said he was “unable to respond to any queries or comments in respect of our clients”.
The Enfield LLPs illustrate the shady offshore finances of the oligarch-owned bank that is the cornerstone of Ukraine’s financial system: these five LLPs hold nearly three times more deposits at PrivatBank than all those of Ukrainian industrial firms put together.
Moreover, the ‘real’ businesses that hold a mere UAH3.3bn worth of deposits at PrivatBank comprise mostly companies linked to PrivatBank shareholders: chemical firm Dniproazot, power companies Sumyoblenergo and Chernigovoblenergo, Krivoj Rog’s Iron-Ore Combine, and Nikopol ferroalloy plant.
Offshore companies registered in the tax havens of Cyprus, the British Virgin Islands and Belize account for another UAH9bn of assets on the PrivatBank accounts. Many of these feature as trading companies within the business structures of the Privat group shareholders. Another UAH3.7bn in deposits is held by a swathe of obscure Ukrainian limited companies, which are in turn mostly owned by offshores.
This means that over half of the PrivatBank corporate deposits of UAH40bn are controlled via offshores, the ownership of which are impossible to trace, but which market participants widely believe are controlled by the shareholders of PrivatBank. Another UAH15bn of corporate deposits apparently comprise deposits less than UAH10mn, which are not listed among the leaked data.
The UAH40bn of corporate deposits are puny compared to the UAH147bn that Ukrainian households have placed in retail deposits with PrivatBank – 37% of all Ukrainian household savings at the last count, with the number rising every week. Ukrainians believe their money is safe whatever happens to the banks, thanks to the state’s guarantee on household deposits up to UAH200,000.
The discrepancy between how PrivatBank hoovers up the nation’s insured savings, while uninsured corporate depositors stay clear of the bank, alarms many observers. “Sure it is a vacuum cleaner. And now it looks like... an entity that funds its operations from new debt,” says Oleksandr Paraschiy, head of research at the Kyiv-based brokerage Concorde Capital, referring to the bank’s addiction to retail deposits and the massive extent of what appears to be related party lending at the bank, as revealed by bne IntelliNews.
PrivatBank points out that its headline figures are healthy, posting a 6.5-fold rise in profits in January-September on the year to UAH592mn, with 5% growth in assets. In June, President Petro Poroshenko claimed that “there are no threats to the functioning of PrivatBank”.
Nevertheless, there are growing signs the bank could be headed for nationalisation. An International Monetary Fund (IMF) memorandum signed with Ukraine in early September stipulated provisions in case of nationalisation of one of Ukraine’s systemically important banks; PrivatBank is the only privately-owned bank that the National Bank of Ukraine (NBU) categorises as systemically important.
On November 16, the deputy head of the NBU, Katerina Rozhkova, told a press conference that the central bank is still conducting on-site verification of whether PrivatBank’s shareholders have fulfilled the recapitalisation requirements laid down by the IMF, which in the case of PrivatBank she characterised as running to “very large volumes”. On November 29, she again referred to the “one bank” that has not yet completed the verification process, leaving little doubt as to which bank she had in mind.
On November 25, Fitch Ratings failed to upgrade PrivatBank from the pre-default ‘CCC’ rating, despite a sovereign upgrade for Ukraine one week earlier. The bank’s Eurobonds due 2018 consequently dropped to trade at around 50 cents on the dollar from 80-85 cents, before recovering to around 65 cents.
This collapse in the bond price triggered a wave of public discussion about the bank and its possible nationalisation.
Dragon Capital bond expert Serhiy Fursa led the way, calling for taboos to give way to public discourse. “Everyone in the financial world is whispering about [PrivatBank’s] nationalisation, but nobody will say anything out loud,” he wrote.
A senior World Bank official in Ukraine, commenting in a personal capacity on Facebook, recalled personal discussions with current NBU head Valeriya Gontareva about PrivatBank dating back to 2007. “The problems and the result were obvious already back then… The vacuum cleaner grew stronger after 2010 and met with no resistance. Regulators slept.”
Others have warned about publicising the bank’s problems at all. “If we start discussing PrivatBank’s nationalisation at 1pm, it will be nationalised by 3:30pm,” cautioned Vladimir Fedorin, reform guru and former chief editor of Forbes Ukraine.
“We do not comment on rumours – they are baseless and have no future,” PrivatBank spokesperson Oleg Serga commented to bne IntelliNews. “Let it lie on the conscience of those who talk of things that do not exist.”
And PrivatBank’s head of IT, Dmytro Dubilet, blogged that: “The worst thing about rumours is that you can’t directly refute them without spreading them further.” Dubilet, the mastermind behind PrivatBank’s legendary custom software built by an army of in-house developers, is the son of CEO Oleksandr Dubilet, who has run the bank since 1997.
PrivatBank is now fighting back on the PR front. PrivatBank representatives have since embarked on a lobbying tour of the US, including meetings with JPMorgan Chase, the bank’s main international partner.
The PrivatBank pitch is that it has transformed into a powerhouse of lending to startups. To underscore the point, the bank just bankrolled a nationwide PR campaign called “Ukraine – country of entrepreneurs”, which is a “national programme for enterprise development and job creation in private business”. The campaign claims its goal is to create 1mn jobs over the next two years by supporting startups, according to the hype.
The bank has indeed been lending to ‘start-ups’. But as bne IntelliNews has revealed, this lending was actually concealed related-party lending on a vast scale; most of loans to firms with less than two years’ credit history went to 21 newly registered firms in the city of Kharkiv, owned by a handful of individuals who are former managers of Privat group affiliates. These firms appear to be cogs in the PrivatBank shareholders vast and murky motor fuel retail business, which accounts for up to 90% of all PrivatBank lending, according to bne IntelliNews’ analysis of the loan book.
Given this environment, the odds of a nationalisation of PrivatBank only grow by the day, which won’t come cheap for Ukraine. According to the memorandum signed in September with the IMF, Ukraine is allowed to issue up to UAH166bn (€5.9bn) in government bonds by the end of the year to cover bank recapitalisation and deposit insurance – funds from which are understood to be earmarked in the event of PrivatBank’s nationalisation.
Given such a massive cost of nationalisation, regulators will push for a bail-in on the part of major depositors as well as bondholders. Only then will it be seen how much of the funds held in PrivatBank by the Enfield LLPs – but not declared to British tax authorities – and by the other offshore depositors remain on the bank’s troubled books.