#Ukraine’s PrivatBank: Nationalized or captured?

A too-big-to-fail bank taking on water during an economic crisis is nationalised for the greater good of the economy; if all goes well, the financial system stabilises and the IMF rewards the government with a bailout to keep the lights on. Variations of this generic story have played out in several European countries over the past decade, including most recently in Ukraine. Only here, unlike in countries like Ireland or Portugal, the dull work of nationalising a bank took place against a backdrop of feuding oligarchs, endemic corruption, and a Russian-backed insurgency. This made for a warped political landscape in which nothing was as straightforward as it seemed.

Indeed, new documents made available to EuReporter expose the shady politics behind the nationalisation of PrivatBank in 2016 and raise the question: was it an effort to save a systemically critical bank from going bust, or was the bank hobbled by the government so they could deal a blow to its powerful owner as part of a political power grab?

Until it was nationalised in December 2016, PrivatBank was Ukraine’s largest commercial lender, with more than one third of private deposits in the country, a 36% market share of retail clients and 20% of all banking sector assets. Its owners, Igor Kolomoyski and Henadiy Boholyubov, had succeeded in growing it to this size on the back of the post-2010 economic expansion in Ukraine. Even as the economy plummeted with the start of the 2014 conflict between the government and Russian-backed separatists, PrivatBank fared better than most lenders. In that year, even as the fighting drastically curtailed Ukrainian banking, PrivatBank still turned a profit, albeit 60% lower than the previous year. In 2015, it was one of the few to turn a minor profit in an industry that experienced total losses of UAH 80 billion. The following year, however, it recorded an enormous loss of UAH 135 billion.

Like all lending institutions in the country at that time, PrivatBank was in trouble, to be sure. However, in August 2015, the bank’s owners secured a three-year extension on repayment of its Eurobonds – a resolution that was well received by international analysts – and as late as two months before it was nationalised, Ukrainian President Petro Poroshenko said the bank had sufficient liquidity.

Nevertheless, in what Oleg Gorokhovsky, PrivatBank’s deputy chairman, would later describe as a series of “information attacks,” a succession of news stories emerged in 2016 claiming that the bank needed a far bigger recapitalisation than previously thought, was rife with fraud, and was ripe for a government takeover. In August, the same month that Poroshenko had confirmed that PrivatBank was in good health, the media began churning out stories about the amount of recapitalisation the bank required. For its part, PrivatBank estimated that it needed a UAH 10 billion capital injection, yet this was dwarfed by the numbers put out by the media of UAH 30-80 billion. The Ministry of Finance went even further, estimating it needed UAH 117-148 billion, 10-15 times what the bank itself reported. Similar number-swelling took place regarding the extent of related party loans on the bank’s books. According to a PwC audit at the end of 2015, loans issued to related parties amounted to 17.7% of the bank’s total loan portfolio, while an EY audit a year later found that related party loans accounted for only 4.7% -- figures that both would have met International Financial Reporting Standards criteria. However, these facts were drowned out by media commentary that called PrivatBank a “vacuum cleaner for the local population’s savings.” Valeriya Gontareva, then President of the National Bank of Ukraine (NBU), even claimed that the number of related party loans was closer to 99-100%, far more than earlier estimates of 4-18%.

If Gorokhovsky’s contention that these statements amounted to an information war against PrivatBank is to be entertained, then Gontareva’s role in this process warrants serious scrutiny.

Before being appointed NBU head by Petro Poroshenko, Gontareva was the chair of a financial group called Investment capital Ukraine (ICU). In this capacity, she worked as Poroshenko’s financial manager, overseeing the sale of Roshen, his confectionary corporation – which the Panama Papers revealed to be an elaborate effort to set up an offshore company to disguise his ownership.

Given her previous work with Roshen, Gontareva has been considered a close confidant of the president – one who allowed him to keep a tight grip on NBU policy. Just before she stepped down from her position at the bank in May, the National Anti-Corruption Bureau (NABU) began to investigate allegations of corrupt practices by senior NBU officials working under Gontareva –practices which included the misdirection of funds into overseas accounts that had been allocated to refinance Ukrainian banks. According to NABU chief Artem Sitnik, “such decisions were not taken without the consent of the top management of the NBU.”

Our research shows that given Poroshenko and Gontareva’s close relationship and the corruption allegations clinging to them both, the “information attacks” could well have stemmed from the government’s political machinations rather than purely economic concerns. Could Poroshenko, working through his proxy at the NBU, Gontareva, have had anything to gain by bringing PrivatBank under government control?

For one thing, it was an effective way to neutralise his political rival, Kolomoyski. Besides co-owning PrivatBank, Kolomyski had briefly served as governor of Dnipropetrovsk region, where he had funded militias that successfully contained a separatist insurgency taking root in neighbouring Donetsk. Ironically, it was the government that had initially encouraged businessmen to bankroll these militias – which later came to be seen as a threat.

The newly uncovered evidence thus suggests that the nationalisation of PrivatBank was far less about economic rectitude than it was about a campaign to hobby one powerful oligarch to the benefit of another. The affair also raises serous concerns about the extent of state capture in the banking system and lack of institutional independence that allowed the government to marshal a campaign against a presidential rival. Peeling back the IMF imprimatur and looking at the nationalization in the lurid light of Ukrainian politics, it becomes clear for what it is: a naked power grab.

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