Ukraine’s talks with the International Monetary Fund (IMF) have “stalled” and a deal before the end of this year is looking increasingly unlikely because of the dispute over the snowballing Privatbank crisis.
“The discussions with the IMF for the next funding tranche are frozen, stalled because of the issue of PrivatBank,” Deputy Central Bank Governor Kateryna Rozhkova told Reuters in an interview. “It is a red line for them, and for the international community.”
The former owner of the bank, oligarch Ihor Kolomoisky, has filed hundreds of law suits again the National Bank of Ukraine (NBU) that are attempting to unpick a series of agreements he signed with former NBU governor Valeriya Gontareva to pay back money that he and his partners siphoned out the bank using shell companies and what the new management of the bank call “fraud loans” as the new Privatbank CFO Anna Samarina described them to bne IntelliNews in an exclusive interview in June.
In the latest case the decision to nationalise the bank made by Gontareva in December 2016 may be undone altogether. The Kyiv Economic Court was due to reach its verdict in the case on October 9, the day before Ukrainian president Volodymyr Zelenskiy gave a “marathon” press conference, but postponed the decision to October 17.
The new Zelenskiy government was hoping to come to a rapid agreement with the IMF on a new Extended Fund Facility (EFF) after taking power in September, to replace the most limited Standby agreement (SBA) that was in place before. However, talks quickly ran aground over the Privatbank issue as Zelenskiy has not come out strongly to reassure the fund the bank will not be returned to its former owners nor any compensation paid, as Kolomoisky has suggested.
The IMF team left Kyiv in September without concluding a deal that was partly scuppered after Gontareva’s house was burnt to the ground in an arson attack. Moreover, it soon became clear that the rift between the IMF and the government was deeper than first thought when Ukrainian Prime Minister Oleksiy Honcharuk said no deal was likely by the IMF annual general meeting in October either and nothing should be expected before the end of the year.
It is noteworthy that it was the NBU that shared the first concrete confirmation that the talks with the IMF are frozen as it suggests there is a growing rift between the central bank and the Zelenskiy team over Privatbank and banking policy in general.
Privatbank is now directly owned by the central bank that has pumped in a massive $5.5bn to close holes in the balance sheet and its new management have been restructuring the business with some success. The bank reported not only a record profit but the largest profit ever earned by a Ukrainian bank for the January-September period of $1.1bn last week. However, while non-performing loans (NLPs) for the whole sector dipped below 50% for the first time in years as the sector moves back into profit, just over 80% of Privatbank’s loans remain non-performing as a result of the bank’s inability to collect on the non-existent collateral on the so-called “fraud loans” authorised by Kolomoisky when the bank was under his control.
Rozhkova’s comments are likely to be calculated by the NBU to put pressure on Zelenskiy to support the NBU’s attempts to fight off Kolomoisky legal attacks. Zelenskiy disappointed during his marathon press conference last week by failing to come out with a strong clear statement on the future of Privatbank. Instead of confirming the state has no intention of returning Privatbank to the oligarch, he offered prevarications instead, saying it was up to the courts to decide.
The situation must be borne in mind against the backdrop that the courts in Ukraine remain venally corrupt, and the Kyiv Economic court where the Privatbank case is being heard, doubly so.
The Kyiv Post reported over the weekend an interview with two lawyers working on the case that accused the ruling judge in the case Judge Liudmila Shkurdova of being blatently biased in the case in favour of Kolomoisky’s team.
Firstly Shkurdova closed the proceedings to the public, despite the national importance attached to the case. Then she routinely rejected all the defence’s requests for the introduction of questions and evidence, while placing no restrictions on the prosecution.
“She throws away every petition the defence files,” one of the lawyers told the Kyiv Post. “The lawsuit has degenerated into a farce,” they said.
Rozhkova’s interview with Reuters will embarrass Zelenskiy and puts the NBU into confrontation with the president’s administration. While the Ukrainian economy has stabilised and in theory it can get through the rest of the year without IMF assistance, most of Ukraine’s donor aid is dependent on a functioning IMF programme. Ukraine has raise $3.5bn from foreign investors buying bonds issued on the domestic market and the state has another $3bn of debt to refinance before the end of the year, but reserves and capacity on the domestic market to cover this.
However, ending the IMF programme will jeopardise most of Ukraine’s aid from its partners. The EU alone has lent Ukraine €14bn since 2014 in aid and programmes from the World Bank and other lenders are dependent on an IMF programme being in place. And with some $15bn to refinance or redeem in debt each year for the next few years Ukrainian’s funding needs are still up in the air.
Zelenskiy needs to make some hard decisions going forward, but so far it looks like he is trying to fudge it and keep everyone happy.