Ukraine topples oligarch Zhevago's bank for related party business

By bne IntelliNews September 24, 2015

bne IntelliNews -

 

Speaking about her decision to declare insolvent Ukraine's seventh largest bank, Finance and Credit, owned by iron ore tycoon Konstantin Zhevago, central bank head Valeriya Gontareva said 76% of the bank's lending was to related parties, and that it received huge refinancing loans 2008-2010 under the government of Yulia Tymoshenko, in whose party Zhevago was MP.

In a lengthy interview with Interfax Ukraine, Gontareva said the National Bank of Ukraine (NBU) would now sue Zhevago personally over the bank's debts, but that he was not suspected of criminal behaviour in connection with the bank.

The value of Zhevago's iron ore giant Ferrexpo's shares in London collapsed 50% after the NBU declared the bank insolvent, but recovered by over 6% following Gontareva's interview. 

The bank's insolvency will trigger speculation over a possible change of ownership at Ferrexpo, where Zhevago owns 51%, and truck maker KrAZ, a key supplier of trucks to Ukraine's embattled military.

Doctoring Zhevago

Gontareva said that she first met with Zhevago to discuss the situation at the bank in July 2014, one month after taking the helm at the NBU.

According to NBU analysts, UAH22bn out of the bank's UAH29bn loan portfolio was by that point held by related parties of the bank, including Zhevago's core industrial assets such the Poltava iron ore mine owned by LSE-listed Ferrexpo and truck builder KrAZ, but extending loans to companies where closer inspection was required to reveal the connection to Zhevago.

At the same time, the bank had accumulated colossal debts to the NBU itself that resulted from a flood of refinancing loans disbursed to the bank in 2008-2010, while Yulia Tymoshenko was prime minister, despite the bank not having the status of systemically important bank. Zhevago at the time was an MP in Tymoshenko's party, and regarded as one of the party's financial backers.

Mind the bear trap

According to Gontareva, the bank would already have died in 2009 if it were not for the generous support from the NBU. Its refinancing loans of UAH6.4bn - around $850mn - dating from Tymoshenko's premiership comprised three times the bank's capital by 2014. "No other bank in the country had a comparable figure," Gontareva told Interfax.

The NBU chief said that she had impressed upon Zhevago the need to sell non-core group assets such as KrAZ, tyre producer Rosava, pharmaceuticals company Arterium, or a Kyiv region power plant, in order to raise funds to recapitalise the bank.

"I told him the story about the man who gets caught in a beartrap in the woods, and hears the wolves howling around him. The only way to escape them is to cut off his leg, but this way he lives to tell the tale," Gontareva said. The businessman lost two other industrial plants in 2014 - a shipyard in Crimea and an easten Ukrainian railcar builder - in the wake of Kyiv's loss of control of the territories.

Zhevago agreed a plan of recapitalisation for the bank, allowing the NBU to remove Finance and Credit from the list of problem banks in August 2015. But, Gontareva said, it immediately became clear that Zhevago was not complying with the agreement, and this prompted the NBU to declare it insolvent.

The refinancing loans were collateralised with Zhevago's industrial assets as well as his personal guarantee, the governor said, which makes him liable for claims against his personal assets.

Following the bank's insolvency, the State Deposit Guarantee Fund will now have to pay out a total of around UAH10bn (around $500mn) to 234,000 retail depositors, holding deposits up to UAH200,000, comprising 93.2% of all depositors.
According to a statement by Ferrexpo, $174mn, or 60% of the company's cash, is now frozen in Finance and Credit, while Infrastructure Minister Andriy Pivovarsky said that state infrastructure companies held around $12mn with the bank.

Respect - but see you in court

Gontareva underlined that Zhevago had not siphoned off money from his bank, but had invested in his companies. "By and large this person did not steal, did not siphon off funds, did not siphon off a kopeek of the refinancing loans, he didn't do any of this - respect to him."

According to amendments to the law on banks passed in March 2015, bank owners are liable to criminal prosecution in the event of deliberate bankruptcy of their banks.

Gontareva said that the NBU would now sue Zhevago for return of collateral both in Ukraine and internationally, calling the insolvency of Finance and Credit "the end of the era of oligarch banks".

"Perhaps we will now learn about Mr Zhevago's other cititenships. So this long story has not yet ended," she added.

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