Global Analysis from the European Perspective. Preparing for the world of tomorrow

The nationalisation of Ukraine PrivatBank: how two oligarchs bankrupted a nation

On the morning of 19 December Ukrainians got up to learn about a momentous economic decision: the biggest Ukrainian bank, PrivatBank, had just been nationalised after its two owners used depositors’ money to build a business empire and distributed the money among Jewish organisations in Europe. Why did it have to happen?

A look into the past. PrivatBank used to be Ukraine’s largest bank with 20% of the banking sector and $53bn assets.1)UPDATE: Government nationalizes PrivatBank, guarantees deposits KyivPost 2016-12-18Its history is quite unusual for the country’s realities because it:

  • was one of the first private banks (formed in 1992);
  • was the first bank to introduce plastic cards and ATMs;
  • was the first Ukrainian financial institution to receive an international rating (Thomson BankWatch International Rating Agency, Fitch IBCA);
  • was the first Ukrainian bank to have opened its International Banking Unit in Cyprus in 1999;
  • introduced electronic banking in 2001;
  • received STP Excellence Award from Deutsche Bank in 2003.

In 2015, 12 Ukrainian banks lost their licenses, and 14 have been placed under temporary administration. That came after 17 banks had lost their licenses in 2014. Even in the times of the overall economic crisis in Ukraine when millions of people lost their deposits in other banks, PrivatBank continued to be the most trusted financial institution. But finally, the bank was nationalised, having been earlier accused by the National Bank of Ukraine of having a capital shortage of around $5.65bn.2)UPDATE: Government nationalizes PrivatBank, guarantees deposits, KyivPost 2016-12-18.

Surprisingly, the bank’s main stakeholder, Ihor Kolomoyskyi, the second richest person in Ukraine3)Top 100 richest people in Ukraine, Forbes Vector News 2016-10-16,did not raise any objections to the government’s move. In March 2014 Ihor Kolomoysky was nominated governor of the Dnipropetrovsk Oblast. In March 2015 Ukrainian Parliament wrested from him his controlling shareholding of the state-owned enterprise Ukrnafta.4)Board finally stripped Kolomoisky control of “Ukrnafta”, Pravda 2015-05-19.In response he ordered his private militia to storm the Ukrtransnafta’s Kiev headquaters, calling the government action a ‘raider takeover’ and blaming it on the president. In a few days the situation was solved, but it brought two Ukrainian oligarchs – President Petro Poroshenko and Ihor Kolomoyskyi – into conflict, while the country held its breath. After these events, Ihor Kolomomoyski stepped down as governor of the Dnipropetrovsk Oblast and left the country.

Ihor Kolomoysky is also well-known to European entrepreneurs. The French corporation Swissport accused Kolomoysky of illegal confiscation of its majority stake in its Ukraine subsidiary. Also, the Crimea authorities accused Kolomoyskyi of plundering the deposits of 200.000 Crimeans.

Ihor Kolomoysky and Gennady Bogolubov are a driving financial force of the European Jewish community. The former is the founding father of the European Jewish Parliament, the latter bragged at the international conference of Shluchim about his donations worth millions of euros to the Jewish community, money that probably belonged to the Ukraine depositors, and he even pleaded for more money requests from the audience (see video).

Gennady Bogolubov generosity during International Conference of Shluchim, bragging he donated millions to the Jewish community.

The “bad loans” share in the PrivatBank’s portfolio was assessed at 97% by the regulator and at 80% by market participants. While 97% of PrivateBank corporate loans had gone to companies linked to its two owners and principal shareholders, Gennady Bogolubov and Igor Kolomoisky (they had over 90% of the shares), the bank was not quick in granting credit to ordinary citizens and small companies.

The bank’s leadership has illegally transferred $2bn abroad as part of sham import contracts over the past two years alone. This did not prevent Poroshenko from pledging not to prosecute the bank’s infamous owners. Kolomoyskyi is even rumoured to have his losses compensated for by an amendment to the tax code adopted on 20 December, one day after the PrivatBank was nationalised. The amendment reduces oil field operation charges by almost a half, and Kolomoyskyi held large stakes in Ukraine’s oil industry.

The above-mentioned conflicts did not hinder the leading oligarchs from agreeing to the said major financial decision for the country because politicians, like Poroshenko, depend on the Kolomoyskyi Media Group for their reelection. The only losers in the deal are Ukrainians who will pay for the bank’s problems through the financing from the National Bank of Ukraine.

From one perspective the nationalisation looks like a needed step in bad times. The bank had serious financial problems, and after two years of investigation, the National Bank of Ukraine (NBU) and the Financial Stability Council came to a decision that could rescue the bank. On 19 December in an attempt to keep the situation stable, Ukraine’s senior officials, including the president, the prime minister and the head of the NBU, guaranteed the clients the safety of their PrivatBank deposit. However, in the Ukrainian reality, these are only guarantees from the same corrupted officials who are not true to their own word and have mismanaged the country now for nearly 30 years.5)Oligarchs making gains: the costly nationalisation of Ukraine’s PrivatBank, OSW.

According to Ukraine’s Finance Minister the nationalisation of PrivatBank raised the state’s share in the banking sector to around 50%, which is not what the government had been planning for. Therefore, after the complete stabilisation of Privatbank, the state intends to sell it on transparent conditions. Ukraine’s history teaches us that the bank will probably be sold to the same oligarchs.6)“Privatbank” by the state: the nationalization of losses and privatization of profits, РИА Новости Украина 2016-12-20.

The nationalisation was demanded by Ukrainian international supporters. The state’s decision has been positively received by the IMF, G7 and the European Union, which regard it as an important step towards the stabilisation of the whole Ukrainian banking system. The government’s intention is to strengthen and restructure PrivatBank, and later, at least in part, to sell it to private investors. The International Monetary Fund has insisted that the bank be reorganised as part of the program for overhauling the Ukrainian banking system, and so have made the availability of the fourth instalment of the loan (around $1bn) dependent on this. Representatives of IMF and the European Bank for Reconstruction and Development were also included on the advisory board of the nationalised bank.7)Neprivatnaya Ukraine: how to change the nationalization Privat, InvestFunds 2016-12-12.

Nationalisation of PrivatBank may be seen as a step supported by the IMF to get rid of the Ukrainian oligarchs. Nationalisation of the indebted banks is a common practice worldwide, and it has worked in the crisis times in many countries. However, in Ukraine the whole economy is handled by a small group of oligarchs who gained wealth through political power after the collapse of the Soviet Union. The issue is now whether Ihor Kolomoiskyi will pay up and whether the state’s takeover of PrivatBank will mean the end of the control of the country’s economy by most powerful oligarchs.

NBU sources say that Kolomoyskyi has committed to a three-year plan that could mean a repay of up to $5.3 billion in unpaid insider loans to cover the PrivatBank losses. Given the history of Kolomoiskyi’s shifting financial obligations to the state, his vast business holdings in airlines, media and oil, and his extensive political connections, many remain sceptical whether the oligarch will return the money and whether the power of the oligarchs will be contained.

As we already mentioned, among the biggest debtors to PrivatBank are well-known businesses connected with shareholders of such groups as Ukrtatneft and Dnepravia, but also some not widely known companies. According to Forbes’ investigations some of the debtors who got credits from PrivatBank for more than $1bn UAN, like Natel, Zebrina, Palmira Traiding, have already begun bankruptcy proceedings.8)Neprivatnaya Ukraine: how to change the nationalization Privat, InvestFunds 2016-12-12.

One of the negative consequences of nationalisation of the bank is already visible. Last week, PrivatBank’s clients could not withdraw foreign currencies. The huge recapitalization of PrivatBank can lead to a further devaluation of the hryvnia and increase inflation.

To put the 5.5 billion rescue program into perspective, the whole foreign exchange reserves of the Ukrainian state stands at around $16-24bn. Consequently, two Jewish Ukrainian oligarchs managed to drain, or steal, the amount of money which equals 1/3 of the total of the Ukrainian foreign exchange reserve, making the country extremely vulnerable to speculative attacks. Presently, the bank is completely insolvent, however filing for bankruptcy will trigger unrest in the country.

Petro Poroshenko has already arranged for a $5,5bn loan from IMF to settle such significant indebtedness and to prevent a new popular revolt at Maidan. Meanwhile, Ukraine’s foreign debt will continue to grow as a liability for the next generations. Under Ukrainian conditions, corrupt officials will probably escape the prosecution. That’s what is called fighting corruption. The international community also accepts the corrupt oligarchs in Ukraine because they have the experience and the right skills to work with foreign donors.

Therefore, with all its logical advantages and international support, the nationalisation of PrivatBank remains a very controversial event in Ukraine’s banking history. The consequences are tough to predict. Although similar processes have been seen in many other states, it does not mean that it will succeed under Ukrainian conditions. The biggest part of success will depend on the desire of Ukraine’s governors to actually fight the corruption and the international pressure into the corrupt officials to do so.”

References   [ + ]

1. UPDATE: Government nationalizes PrivatBank, guarantees deposits KyivPost 2016-12-18
2. UPDATE: Government nationalizes PrivatBank, guarantees deposits, KyivPost 2016-12-18.
3. Top 100 richest people in Ukraine, Forbes Vector News 2016-10-16
4. Board finally stripped Kolomoisky control of “Ukrnafta”, Pravda 2015-05-19.
5. Oligarchs making gains: the costly nationalisation of Ukraine’s PrivatBank, OSW.
6. “Privatbank” by the state: the nationalization of losses and privatization of profits, РИА Новости Украина 2016-12-20.
7, 8. Neprivatnaya Ukraine: how to change the nationalization Privat, InvestFunds 2016-12-12.

2 comments on “The nationalisation of Ukraine PrivatBank: how two oligarchs bankrupted a nation

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

GEFIRA provides in-depth and comprehensive analysis of and valuable insight into current events that investors, financial planners and politicians need to know to anticipate the world of tomorrow; it is intended for professional and non-professional readers.

Yearly subscription: 10 issues for €225/$250
Renewal: €160/$175

The Gefira bulletin is available in ENGLISH, GERMAN and SPANISH.