Ukraine's central bank blames illicit capital flows for hryvnia's slide

By bne IntelliNews February 25, 2015

Graham Stack in Kyiv -


The National Bank of Ukraine (NBU) and the government are scrambling to stop illict capital flight, which they blame for the hryvnia's continuing collapse

The hryvnia closed at UAH32 to the dollar on the interbank market on February 24, a fall of 11% during the day. The hryvnia has already devalued by 50% to the dollar in 2015, after a 50% devaluation in 2014.

Ukraine's currency is crashing not because of ordinary Ukrainian rushing to buy dollars, says NBU head Valery Gontareva, but because of illict capital flight:

“It is business, not individuals, that are negatively influencing the market,” Gontareva said on February 24, as quoted by Finmaidan. “Importers and exporters are using import contracts with advanced payment conditions to export capital, and this is what is putting pressure on the foreign currency market,” she alleged. “All operations with advanced payments will be checked for legality and correctness,” Gontareva warned. 

Advance payments on fictitious import contracts are a classic form of illict capital flight, according to the state financial monitoring service. Exporters with large hard currency revenues, of which they are required to sell 75% on the market, are currently using fictitious import contracts with advance payment conditions to circumvent these strictures, Gontareva alleged.

Now the NBU will approve all advance payments over $50,000 in value, and any contracts over $500,000 will require a bank guarantee, according to the NBU's new provisions. 

The NBU is also throttling the supply of refinancing loans to banks, since banks appear to be illicitly converting these to foreign currency. “Certain banks are using their refinancing loans to purchase dollars via fictitious firms,” blogged banker Andrei Derkach. Gontareva has announced a ban on banks funding clients' purchases of hard currency.

Things got nasty later in the day, with signs of pressure being put on the NBU. Kyiv city prosecutors announced that Gontareva was under criminal investigation for abuse of power and forgery –  the news hit prime time dispatches, along with footage of demonstrators outside the NBU building in the centre of Kyiv.

As soon as the evening news was broadcast, the prosecutors backtracked, saying that Gontareva herself was not a suspect in the investigation, which was initiated by a court order and a citizen's complain in December 2014. "These are inquiries into facts, not the NBU chief," Kyiv prosecutor's office said in a clarification,

Government crackdown

Adding to the sense of chaos, earlier on February 24, Prime Minister Arseny Yatsenyuk announced an investigation into the heads of the state fiscal service - comprising tax and customs services and financial monitoring - despite their reputation as reformers.

Yatsenyuk said there would be a two-week  probe of their activity and suspensions from duty. “For the first six months you worked as people on the Maidan expected you to work, but the last six months you have worked as always,” Yatsenyuk said.

The move comes after widespread complaints about the work of shadow economy tax-evasion and money laundering schemes. “Every businessman knows the names of these [tax-evasion] platforms,” anti-corruption campaigner Oleksa Shalayskiy told bne IntelliNewsSuch tax evasion platforms organise illegal export of capital via sham firms and fictitious contracts, suggesting Yatsenyuk's crackdown was intended to stem capital flight.

Yatsenyuk alleged that there were “organised crime groups” operating across the tax and customs services and law enforcement. “Organised crime groups within the security service of Ukraine, the customs service, the state prosecution service, are involved in money laundering, protection rackets and schemes designed to rob the country,” he said.

Shortly after Yatsenyuk announced the government probe, first deputy head of the state fiscal service Vladimir Khomenko described such a tax evasion platform run by nine banks. “We are conducting 46 criminal investigations into money laundering platforms, with over 5,000 client companies, creating a total fraudulent VAT credit of UAH 3.6bn ($120m)” he said, adding that his inspectors were about to close down the scheme.

Illicit schemes

Open source investigations indicate that illicit export of capital by major financial-industrial groups has impacted on the hryvnia in 2014 and 2015. Ukraine's online register of litigation contains scores of court cases indicating that one of Ukraine's largest banks illegally exported just under $2bn starting in summer 2014, according to an investigation by anti-corruption NGO Nash Groshi. In an interview in late 2014, NBU head Gontareva said that she had no knowledge of this scheme.

The scheme involves the Ukrainian bank extending a large loan to a Ukrainian firm, believed to be controlled by the bank's shareholders. The Ukrainian firm converts the funds to hard currency and transfers them to UK firms, ostensibly as advance payment for the purchase of tens of millions of dollars worth of goods. The UK company, which has accounts with the Ukrainian bank's Cyprus subsidiary bank, then fails to implement the contract or return the money, leaving the funds abroad. The Ukrainian company  files a pro forma lawsuit in Ukraine against the UK company.


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