The independence of the National Bank of Ukraine (NBU) is under attack, says its former governor Valaria Gontareva, who was responsible for carrying out a sweeping reform of the country’s financial system. But Ukraine is facing an existential crisis as the former owners of the biggest bank in the country, PrivatBank, are abusing the corrupt court system to try and get their bank back after Gontareva nationalised it in 2016. If they are successful then the country faces a new economic crisis and possibly a meltdown of the financial sector.
bne IntelliNews editor-in-chief Ben Aris talked to Gontareva about the details of the nationalisation of PrivatBank on the sidelines of Ukraine’s second annual banking summit in London where she now lives and works as a member of a London School of Economics think tank.
bne IntelliNews: Kyiv courts ruled that the nationalisation of PrivatBank was illegal, which opens the way for the bank to be returned to its former owner, oligarch Ihor Kolomoisky. What will happen if the bank is returned?
Valaria Gontareva: The National Bank is obliged to follow the rules. If there is a court decision to undo the nationalisation of a bank what can the National Bank of Ukraine do?
PrivatBank is a state-owned bank and if the courts ruled that the nationalisation was null and void what does it mean? It means that the Ministry of Finance will not be the owner any more and this bank will be transferred back to the former owners.
But what does that mean for financial stability? It means an absolutely total disaster. The central bank will be immediately obliged to call this bank insolvent. The central bank has only two choices: to either liquidate the bank or again ask the Ministry of Finance to nationalise the bank for a second time.
Why did we avoid the liquidation of the bank in 2016 ? Because for financial stability we had no doubt that we could not allow the bank to be liquidated. It has 22mn customers and it is the biggest systemic bank in the country – then and now. At that time we were very worried about the nationalisation and so we prepared it step by step in cooperation with the Ministry of Finance and it was a very well organised and coordinated action. And it went smoothly.
bne: do the courts even have the authority to undo a nationalisation? The central bank is the regulator. Its job is to judge if banks are insolvent and it is obliged to close them down if they are to preserve the stability of the banking sector. Aren't these courts simply corrupt in that the decisions are being bought?
VG: Absolutely, no doubt [these courts are being bought]. Even I said bluntly unfortunately it is a corrupt court system and the general prosecutor's office is doing nothing to stop it.
bne: Kolomoisky is bribing courts which is illegal but the NBU has had to go back to the courts to appeal the decision. But the system is clearly being abused. Is there no short cut to the appeal process, which has to go through a corrupt court system?
VG: I’m a former central banker and not the general prosecutor. While I was governor for three years there were three general prosecutors. What can I tell you? They didn't do any reforms and all this system is corrupt but the central bank has no authority over this.
All the international community support the central bank and independence of the central bank. They all support the decision to nationalise PrivatBank. And the international community will never tolerate [the return of PrivatBank to the former owners].
If the bank is returned it means the international community will stop working with Ukraine. What does it mean for investors? It means financial stability will be under threat. It is an existential threat for Ukraine. Not just the IMF, but also the European Union and all Ukraine’s other partners too will stop working with Ukraine.
Then Ukraine won’t be able to meet its debt obligations. Over the next five years the budget expenditure for debt repayment and financing the budget deficit is 8% of GDP a year – $11bn-$12bn a year – and our country has no ability to do that without the international community and international investors’ help.
Kolomoisky called for Ukraine to default on its IMF debt in the Financial Times interview. But nobody will allow him to get the bank back nor will they pay any compensation. For what? For stealing $5.5bn? Or more. Today the CEO of PrivatBank said he still owes the bank UAH200bn, which means $7.6bn, not $5.5bn, which we injected into the bank.
Privatbank has separated the non-performing loans (NPLs) into two classes: bad loans that are the result of the normal course of business and the “fraud loans” which were a result of the former owners' scams to withdraw money illegally.
bne: is there any doubt that the money taken out of Privatbank was taken out illegally?
VG: How can there by any doubt? The bank was a pure pyramid scheme. It was a pure Ponzi scheme. The central bank is not Kroll. It is not a forensic auditor. The central bank identified all these gaps [in the balance sheet] and then hired Kroll to conduct an investigation. Then the lawers prepared their case.
It was 100% certain that the money was stolen. I left the central bank two years ago and initially during the nationalisation I said together with the former finance minister Oleksandr Danylyuk that the hole in PrivatBank’s balance sheet was UAH146bn ($5.5bn).
After the nationalisation we had a post-audit of the bank that was carried out by EY. They said to us: “Central bank you were wrong. You need an additional UAH138bn ($5.2bn) of capital [to close the balance sheet gap.]”
The total of UAH155bn that was injected is less, but only because we did some bail-ins for depositors.
After two years not a single kopek has been repaid. The central bank has complied a list of related party transactions and it was absolutely clear that all this money taken by the owners of this bank.
bne: Didn't you meet with the former shareholders and didn't they sign a letter guaranteeing they would repay much of the missing money?
VG: There was a letter where the owners promised to repay some of the money but they ignored it.
To go back and put this letter into context: At start of 2015 we started a diagnostic of all banks – not just PrivatBank. All the banks were checked. The methodology that was used was the same for all Ukrainian banks. We looked at asset quality and stressed tested the bank. The criteria was developed by the central bank together with the IMF.
The first results showed us that in 2015 there was a real gap in the capital of PrivatBank worth UAH113bn and in 2016 a recapitalisation plan was agreed with PrivatBank.
The plan was the same for all Ukraine’s banks. They were given four years and in the first year had to reach a capital adequacy ratio (CAR) of 0% by April 2016 before gradually building up their CAR to 10%, the mandatory minimum.
PrivatBank’s shareholders committed together with the management to fulfil all these obligations.
At the same time they had to reduce the amount of related party lending and deleverage. Over five years they had to repay all these related party loans and eliminate all this lending.
PrivatBank was just a pyramid based on related party lending. But that was not the biggest problem. We had this programme to eliminate related party lending, as it was not just a problem in one bank – it was the biggest systemic problem in the entire bank sector.
The owners agreed to the obligation and signed guarantee letters. Kolomoisky himself provided his personal guarantee to fulfil these obligations – not just to pay off this UAH113bn for the recapitalisation.
In the first stage of the recapitalisation the owners were supposed to put UAH31bn of real assets on their balance sheet. The recapitalisation was one problem but the main problem was all this related party lending was never done properly, loans with real collateral and real cash flow. [The debtor companies] were just empty shells.
When we injected UAH115bn [into PrivatBank during the nationalisation] we injected real assets, because before it was just a list of empty fraudulent companies.
The first recapitalisation was supposed to be completed before April 1, 2015 but unfortunately because PrivatBank was not putting in good assets it was delayed to August. Finally under the pressure of the central bank they put in the UAH31bn.
But then the central bank decided to check the register five days later and of all these assets, UAH5.5bn from the UAH31bn, had already been withdrawn. It means [the shareholder] didn't even meet the first of their obligations to recapitalise the bank. It was fraud again.
In the second stage they were obliged to put in UAH74bn and transfer all these assets from shell companies to real operational businesses. [The Privat Group] is an empire. They have all these assets in the US, in the UK, in other countries. Not to mention a lot of assets in Ukraine.
It was a programme to put real operational assets, with real assets, with real cashflow into the bank to replace these shell companies and then they would have fulfilled their obligations.
They pretended they started to do the second stage. But we recognised they didn't and it became clear to us that they would not meet their obligations.
We meet with shareholders. They again proposed guarantees. We proposed nationalisation and they proposed we suspend the deadline.
But once again they started to create new fraudulent companies. They started to make new loans to other problem companies. We insisted that they have an audit. And EY confirmed our suspicions and found even more problems – and post nationalisation EY recognised even more.
So we sent a letter to the Ministry of Finance and said it's time to consider nationalisation.
In the middle of 2015 we started the process of nationalisation. I gave speeches to reassure the public. “Guys don't worry. We are working on a programme to recapitalise PrivatBank. But in case this plan is not fulfilled we will nationalise this bank.” We could not cause a panic in the sector. It's the biggest bank. It's not just a third of private deposits but it's 50% of transactional business in the country – half the banking sector was PrivatBank. It is also 40% of the Ukrainian monetary base.
On top of that we had to avoid the “red button risk”. If you push this button they could operationally stop the bank and that would mean a blackout in our country.
That is why the Ministry of Finance provided them six months to repay the loans and complete the recapitalisation plan. But again they didn't do anything again in the next six months.
bne: Given the obvious fraudulent nature of the loans and the shareholders' unwillingness to stick to their promises, why aren’t they in jail?
VG: I ask that all the time not just about Kolomoisky, but also of the hundred banks that we already sent for liquidation
But [during the reform process] we stopped this oligarchic model in Ukraine and we cleaned up the state banks. The reforms are completed. The first stage was clean up. The second stage is corporate governance. The third stage is sustainable growth – an endless stage – but we are now in the third stage.
This article is based on a bne IntelliNews podcast. Listen to the full interview here
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