PrivatBank’s NON-private story

PrivatBank, Ukraine’s largest commercial bank, became a state-run institution on December 19, 2016. The Cabinet’s press service announced the day before, December 18, at 22:30 (!) that this was done on the basis of the National Bank of Ukraine’s recommendations and the decision at an extraordinary session of the National Security and Defense Council. The Ministry of Finance is receiving 100 percent of PrivatBank’s shares and establishing its management with ex-finance minister Oleksandr Shlapak at the head.

The state (read: we as taxpayers and our children/grandchildren because debt papers were issued at a 30-year repayment term) has paid 148 billion hryvnias for this “purchase.”

Those who wield power now explain that the nationalization was caused by “the bank’s unbalanced credit policy which resulted in the loss of capital by the bank.”

REUTERS photo

“Observing the law, standards, and capitalization plans is a must for a sustainable development of banks and the country’s financial stability. As shareholders failed to carry out the program of recapitalization in 2015, the National Bank of Ukraine has initiated, with due account of the bank’s importance, the state’s participation in the bank’s capital,” NBU Governor Valeria Hontareva said at a press briefing.

COMMENTARIES

Bohdan DANYLYSHYN, chairman of the Board, National Bank of Ukraine:

“In the current conditions, the latest decisions on PrivatBank will lay the groundwork for a successful performance of both PrivatBank and the entire banking system of this country. PrivatBank, a systemic bank and a major saving institution in the country, is very important to the state’s financial system. I think it is a right decision of the government and the National Bank at the current stage. The state is aware of its importance for this country’s financial and economic security and national security as such. Besides, state-run banks, such as Oshchadbank, Eksimbank, et al, have proved their reliability by effective performance and depositors’ confidence.

“The state in the person of the Ministry of Finance will be a 100-percent owner of the PrivatBank joint-stock company and guarantees that this institution will function uninterruptedly and that its clients’ funds will be duly saved. The bank’s clients have no reason to worry about the saving of their money if the state assumes responsibility. These actions are being taken in clear coordination with and support from international financial organizations.

“In addition, PrivatBank’s private shareholders have proposed to the government that the state fully own the bank in the interests of its clients. This guarantees further joint and consistent work with the bank’s depositors.

“These decisions will also ensure a smooth transition and a stable activity of PrivatBank in the customary mode.

“I emphasize again that it is an absolutely well-balanced decision at this stage, for it makes it possible to secure financial stability and improve the effectiveness and transparency of the country’s banking system.”

Vitalii SHAPRAN, financial analyst:

“There is no reason why PrivatBank’s creditors and depositors should feel concern – the bank’s credit risk was drastically reduced on Monday because the state has taken all of its risks. As before, state-run banks in Ukraine remain reliable in the long term, and their operations are guaranteed by the state as an emission center. What does this mean? If any problems arise at the bank, the state can recapitalize it by means of either a public debt or an emission mechanism.

Photo by Ruslan KANIUKA, The Day

“The nationalization of PrivatBank will have no essential impact on the hryvnia’s exchange rate. I think there may be a surge of activity on the cash market, but the state is going to inject 30-year public bonds worth about 150 billion hryvnias into the bank’s capital. Firstly, this does not mean at all that the bank’s balance has a 150-billion-hryvnia hole. Recapitalization is usually carried out liberally in order to ensure a stable dynamics of H2 – the factor of the adequacy of regulatory capital. Secondly, PrivatBank was generously provided for with ready assets in December, and this does not mean that all the 150-billion-hryvnia public bonds will be immediately thrown onto the secondary market, turned into hryvnia cash, and begin to permeate the market. The package can be used gradually for many years.

“Will payments be stopped and an interim administration (IA) be introduced? In the standard case of an insolvent bank, an IA is mandatory. It is also advisable to introduce an IA to supervise the transfer of a bank to a new owner.”

“THESE DECISIONS ARE NOT SOMEBODY’S PRIVATE AFFAIR”

Petro POROSHENKO, President of Ukraine:

“I consider it my immediate duty to explain the essence of yesterday’s steps about PrivatBank.

“Although it is the question of a private banking institution, these decisions are not somebody’s private affair. They directly concern almost a half of Ukraine’s adult population – natural persons who are this bank’s clients, – as well as about 50 percent of all the legal entities registered in Ukraine.

“The entire financial and economic situation in this country indirectly depends on the state of affairs in this bank because it is large or, as specialists say, systemic.

“For this reason, it cannot be placed in the Procrustean bed of standard bank revitalization techniques. This is why we are making an unprecedented decision – putting it into 100-percent state ownership.

“The state is assuming responsibility and guarantees the inviolability and integrity of PrivatBank clients’ money.

“To strengthen the protection of PrivatBank’s depositors, I have urgently submitted to the Verkhovna Rada a bill that provides additional guarantees of deposits at this institution. They will be the same as those of Oshchadbank, a bank that is 100-percent owned by the state.”

Conversely, the PrivatBank management claims that what in fact “brought the bank down” were well-orchestrated information attacks on it.

For example, Oleh HOROKHOVSKYI, first deputy chairman of the PrivatBank board of directors and a minority shareholder (0.36 percent of shares), says that since the beginning of hostilities in the Donbas, the annexation of Crimea, and against the backdrop of a sagging economy, the bank has suffered seven (!) information attacks. Each of these media-fanned “hysterias” cost the bank thousands of lost scared depositors.

“But the latest attack a week ago was the bitterest. Every day we broke a record in the amount of money given to panic-stricken customers by ATMs and in offices,” PrivatBank IT director Dmytro DUBILET explains. According to Horokhovskyi, ATMs dispensed more than 2 billion hryvnias (!) a day. Oleksandr DUBILET, ex-chairman of the PrivatBank Board of Directors, says that things like this never happened even when military operations were on the rise. “At the time, people used to withdraw a record 1.6-1.7 billion in cash through our ATMs,” Dubilet said at a joint PrivatBank-NBU press briefing.

Photo by Ruslan KANIUKA, The Day

In Dubilet’s words, the latest informational pressure on the bank compelled its owners and management to decide to hand it over to the state.

“Well, they finally put us down. It is not nationalization but a classical hostile takeover. I advise clients not to panic – everything will be OK with their money. This impaired only the owners and the investment climate in this country. Frankly, this climate no longer exists,” businessman Ihor KOLOMOISKYI allegedly wrote on what many think is a fake Facebook page at 1 a.m. on Monday two hours after it was officially announced that PrivatBank was now 100-percent owned by Ukraine’s Ministry of Finance. But as soon as at 10 a.m. a new post on the same page said the PrivatBank had fallen due to an information attack, but this time Facebook’s Kolomoiskyi was much more outspoken than the bank executives:

“In any civilized society, a sound-minded government helps national business. In our country it is just the reverse. The National Bank stands through thick and thin by Russian banks (google the ‘Rozhkova notes’), but it won’t lift a finger when information attacks go wave by wave at the Ukrainian PrivatBank. The point is that these attacks are orchestrated from Bankova St. [Presidential Administration. – Ed.], aren’t they, Ms. Hontareva? I have always wondered why the National Council [for Television and Radio] is not revoking the license of the Inter TV channel. Its information policy, Russian entertainment shows with Kobzon [a blacklisted singer. – Ed.], and even publication of the mail of producer Stolyarov, a 100-percent Russian special forces agent, did not cause our bureaucrats to react. It is clear now why it was left intact. Inter executes the dirtiest commissions of President Poroshenko’s Administration. It is this channel’s latest prime time information attack that became the last straw for us. You won’t get away with this, Liovochkin’s and Firtash’s creeps. Upon my word! We could have continued to struggle, filing and winning suits at European courts. But this would have harmed depositors, for money likes silence, all the more so in this country, where millions of people have already lost their deposits, both in the Soviet era and in independent Ukraine, when banks crumbled away one by one in crises. Mass-scale withdrawals of deposits result in a chain reaction. No recapitalization will help in conditions like that, all the more so with the connivance and tacit involvement of the National Bank in information attacks. We have taken this step for the benefit of almost 20 million Ukrainians.”

CONTEXT

In 2015 PrivatBank stood an NBU stress test, by the results of which the capital deficit was assessed and a three-year recapitalization plan was mapped out. But shareholders were not exactly rushing to fulfill the latter. In early December, PrivatBank remained the only one of the top 20 banks, which had not yet finished the second stage of recapitalization. The NBU kept extending the deadline to verity an almost 30-billion-hryvnia-worth recapitalization of the bank.

Neither the National Bank nor PrivatBank disclosed the aggregate worth of the “hole” on the bank’s balance sheet, which brought about rumors that it is from 100 to 152-166 billion hyvnias “reserved” by the government in the IMF memorandum in 2015-16 for supporting the banking system. The shortage of capital was caused by the crediting of related parties, the loss of credit portfolios in the occupied Crimea and the ATO zone, and three devaluations of the hryvnia.

The recently published financial stability report showed that, according to the FinClub, PrivatBank’s outstanding credit risk might range from 85.7 billion to 96.6 billion hryvnias. PrivatBank’s spokesman Oleh Serha said then that “the quality of assets in the largest bank is far higher than in other large ones” and advised to proceed from the audited information. Neither PricewaterhouseCoopers, which audited the bank’s 2015 report, nor the Fitch rating agency, which confirmed the bank’s international rating as CCC in late November (Ukraine has the highest ranking – B), spotted any catastrophic problems in PrivatBank.

PrivatBank has not yet given an exhaustive answer to suspicions of smuggling out of the country $1.8 billion in 2014 under import contracts with 42 PrivatBank-linked companies. Questions also arose about the credit portfolio to related parties – if press publications, not the bank’s assurances, are anything to go by, they made up 80-90 percent of natural persons’ credit portfolio, and monthly losses of the interest-based income allegedly came to 500 million hrynias. But the bank’s reports did not show this. “We continued to be profitable and were timely repaying NBU loans,” Dmytro Dubilet emphasizes. As of October 1, 2016, the bank owed 21.1 billion hryvnias to the National Bank.

Was it necessary to nationalize PrivatBank? Serhii FURSA, a specialist at the fixed income sales department of Dragon Capital, affirms: “Nationalization is a bad decision. But it is the best possible one in the situation to which our greed and failure to make important decisions have led us.”

Although IMF MD Christine Lagarde has welcomed Ukraine’s decision to nationalize PrivatBank, it is clear that, by doing so, Ukraine is giving a bad signal to the outside world and investors. In essence, declaring decommunization, the current leadership shows that it is guided by a diametrically opposed logic of actions. You can change street name signs endlessly, but it is enough to do something like a National Security and Defense Council (RNBO) meeting on Sunday, December 18, late at night to make it clear that all this name-changing is nothing but a decor. Why should the president deal with a bank’s nationalization? Why should RNBO deal with a bank’s nationalization? Because such instruments of a civilized state as the National Bank, the Antimonopoly Committee, the Security Service, and, after all, the State Financial Monitoring Service do not in fact work in Ukraine. The oligarchic clan system has made a strenuous effort to eliminate these instruments. But the leadership that came on the wave of the Revolution of Dignity must, above all, work to restore them. Instead, they are switching everything to the “manual mode,” which in fact represents a grave danger.

“Whenever a bank faces the problem of capital shortage, there are several options. The bank may be liquidated or nationalized, the owner may contribute the necessary capital, or one can do nothing at all. As PrivatBank is a system-forming bank, it must not be liquidated, for this would produce a too strong social effect and deal a very heavy blow to and shake confidence in the financial system. It takes a long time to recover from a blow like this. And the executives are very different. Recapitalization by owners would be the best solution,” Fursa maintains. “In the course of recapitalization, they should have been gradually contributing billion after billion to the capital. They would have been giving their own money, thus reducing the risks of nationalization. But this is next to impossible, given the level of mutual trust among Ukrainian decision-makers, even if the owners were willing to do so.”

Why did Kolomoiskyi fail to hold back PrivatBank which, according to the NBU, the Ministry of Finance, and the Presidential Administration, has such powerful and effective instruments and is a systemic, technological, and innovational bank? Maybe, there was some other reason why shareholders were withdrawing resources, which formed such a gaping hole? Maybe, the point is that the owner foresaw the result of all this? And why did he foresee it? Because, when Kolomoiskyi became a governor, MPs and journalists began to create a situation in which the final of him and his business in Ukraine was discernible.

SUBTEXT

When did Ihor Kolomoiskyi begin to have problems in business? When he suggested that the superrich “pay in addition.” He made a relevant statement in a live program, “The Right to Power,” on his 1+1 TV channel after taking part in a sitting of the Parliamentary Ad Hoc Control Commission on Privatization. Kolomoiskyi had told MPs about the scandalous sale of Ukrrudprom and the $110-billion bribes he paid to the president’s son-in-law Viktor Pinchuk. He even suggested that parliament cancel this corruption-based privatization and renationalize the unlawfully privatized (including his own) assets worth dozens of billions of dollars. Kolomoiskyi also handed over to the Anticorruption Bureau (NABU) the evidence of bribing President Leonid Kuchma and his son-in-law Pinchuk. Den’s sources report that NABU is now preliminarily investigating it as a criminal case (#42015000000000425).

No less important for Ukraine is Kolomoiskyi’s other statements he made speaking to Ukrainian MPs past year. Among other things, he expressed a doubt that the deaths of the former State Property Fund chiefs Mykhailo Chechetov and Valentyna Semeniuk-Samsonenko were pure suicide. As is known, Semeniuk-Samsonenko and Chechetov died in 2014 and 2015, respectively. The former officials were directly involved in the privatization of Ukrrudprom and its consequences.

Before the Revolution of Dignity, only the select few businesspeople and politicians could boast of knowing Kolomoiskyi personally. But the oligarch became a public figure in the spring of 2014, when he was appointed governor of Dnipropetrovsk oblast. As a governor, he went on record as being able to stop separatist sentiments in the region, as well as organizing and funding the army and volunteer battalions. He is also remembered for coming into fierce conflict with the president over the attempt to change the management of Ukrnafta, where PrivatBank and the state owned 43 percent and 50 percent +1 of the shares, respectively, after which Kolomoiskyi was dismissed from the office of chairman of the Dnipropetrovsk Oblast Administration. After abandoning the office in 2015, Kolomoiskyi avoided criticizing the leadership even when one of his closest associates, Hennadii Korban, was arrested. Ihor Kolomoiskyi recently joined the political party UKROP and is now chairman of the party control commission. As the media report, quoting this party’s sources, he “intends to go in for politics openly and seriously.”

COMMENTARY

Christine LAGARDE, Managing Director of the International Monetary Fund:

“Decision of Ukrainian authorities to nationalize PrivatBank is an important step in their efforts to safeguard financial stability. This decision was taken to ensure the smooth operations of the bank given its systemic role in Ukraine’s financial system, and in view of insufficient efforts to strengthen its capital adequacy in recent months.

“Ensuring that all banks operating in Ukraine meet capital and regulatory requirements is essential to maintain public confidence in the banking system and reinforce the banks’ ability to support productive activities necessary for the prosperity of the Ukrainian people.

“It is now important that the process of nationalization be followed by firm efforts to maximize the repayment of related-party loans, and the appointment of an independent management team to restore the bank’s viability, minimizing the cost to the state and taxpayers in line with existing legislation and international best practice.

“The IMF will continue to support Ukraine in its efforts to build strong institutions, enhance transparency, and advance structural reforms which are critical to achieve strong and sustainable economic growth.”

“SINCE THE OUTBREAK OF HOSTILITIES... WE HAVE SURVIVED SEVEN INFORMATION ATTACKS”

Oleh HOROKHOVSKYI, First Deputy Chairman of PrivatBank:

“PrivatBank becomes a national bank... I will answer the most important questions that concern our clients:

“Nothing is going to happen with your money on current, deposit, and card accounts of individuals and entities, as well as with deposits on ‘Service of Profitable Investment.’ This was a key condition in negotiations about the change of ownership.

“The bank will operate on as normal.

“The bank will have a new chairman, Oleksandr Shlapak, who will form a new team of top managers. The old team is ready to provide every possible assistance to them.

“I am sure that customers and employees will not feel any difference in how the bank operates.

“The bank today is a unique machine with great customer service and incredible potential; it works flawlessly and can handle millions of small transaction at a very low cost.

“We retain our main asset – the employees in local offices and in the main office of the bank. Many of them are real professionals, and I am proud to have worked with them as a team for over 21 years, as we created the project of individual VIP customers from scratch, or managed the plastic cards and retail businesses – starting from the time when we had fewer than a million cards issued, and the deposit share was less than 20 percent.

“There will be many comments and official statements about the situation. I think when passions subside, I will write in more detail on how it all happened and how we have worked for the past three years. And now I will write it without delving too much into details.

“Of course, the bank needed the additional capitalization, and we needed to improve the collateral for our loans.

“And we had a plan, up to in 2018. But to implement it we needed a stable, profitable operation of the bank and impeccable payment discipline.

“And the bank has worked smoothly and profitably. Although after the outbreak of hostilities and in the circumstances of the economy in recession, we have experienced seven information attacks. Each attack has resulted in outflows of individual and corporate clients. Each of these attacks would have been fatal to any other bank.

“However, the most powerful attack was the last one. Every day we set a new record for the figures of money withdrawn by frightened customers at ATMs and offices. Over the past days, our ATM network issued more than 2 billion hryvnias a day. Our previous records were short of 1.5 billion hryvnias in peak days. Our heroic cash collectors and cashiers worked around the clock, despite the fatigue and weather conditions. We did not want to fail anyone.

“We have received many words of support. And this was, perhaps, the reason which made it all worth it.

“So far, we haven’t broken a single obligation before our customers.”

“WE HAVE WITNESSED A SURPRISING AND RATHER CYNICAL STORY”

Dmytro DUBILET, IT director of PrivatBank:

“PrivatBank becomes a national bank. Why does this happen?

“Since the war began, our bank has experienced seven information attacks. But the latest attack, which began a week ago, was the most difficult.

By the way, on Saturday, when the panic began to gradually subside, the fatal shot was made by Inter TV channel in the evening news: “On Monday PrivatBank is going to cease all payments! However, we have not received any confirmation or refutation in regards to this information from the bank’s press service.” I think that Inter journalists have a special place in hell reserved for them (I have not received any refutation from the press service of hell).

“Actually, the decision for the voluntary and peaceful transfer of the bank’s ownership to the state in the bank was taken at precisely the moment when we had realized that we might not survive this information attack, and that our customers might come under threat.

“Can we be called deceivers because earlier we had excluded the option of nationalization?

“In fact, no one had thought to nationalize us previously. Yes, there were figures that had deteriorated as a result of war and economic decline (as in every bank), but we moved on with our three-year plan approved by the National Bank. We were still profitable and we had duly returned all credits issued by the NBU.

“Unfortunately, the scenario that unfolded became what sociologists call a self-fulfilling prediction. Ever since our favorite MP Onyshchenko registered a bill on PrivatBank’s nationalization two years ago, hostile media began to raise the topic regularly. And that’s how the nationalization turned into a scary story to frighten our investors, and this led to the today’s situation as a result.”