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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert

TENDENCIES

12 May, 1999 - 00:00

After Elections the Deluge?

Or why risk the last bank
Fortunately, ordinary depositors of the Savings Bank seem to have overlooked
information about top-level bureaucrats planning to pay special attention
to "domestic depositors' investment," using the bank's assets. The worst
has not happened, not yet, and there are no panicky depositors storming
tellers, demanding that their accounts be closed and money paid out. But
the situation calls for a closer look at the causes and possible consequences.

Strange as it may seem (or maybe due to long-established procedures),
those occupying high offices are showing an increased interest not only
in government-run banks, but also in Ukraine's entire banking system. Could
this interest be attributed to the threat of a "systemic" crisis? Maybe
not, because both Western and domestic analysts say this crisis should
not be regarded as the worst threat hanging over Ukrainian banking. They
seem most anxious about Ukrainian banks remaining what they are today.
And they are just a small cog in the huge rusty "national economy" machine
unable to discharge its principal function of investing in projects promoting
economic growth.

In other words, the government's desire to step up its credit activities,
reducing opportunities for financial speculation, in no way contradicts
the interests of the banks and their clients. Another thing is how the
former will be prevented from grabbing easy and not always honest money,
and the latter kept interested in doing business "for money." Experience
shows that such extraordinary tasks can be solved in at least two ways.

The first remains in the spirit of our glorious Soviet legacy, with
holdovers invariably surfacing at all post-Soviet Ukrainian bureaucratic
levels. Consider several of the "initiatives" adopted recently. First,
the Tax Administration has once again tried to annul numbered bank accounts.
To date this "attempt" is in limbo, perhaps awaiting trial, after encountering
pitched resistance from the National Bank and other serious domestic bankers.
Second, the President insisted on lowering loan interest, while issuing
fresh loans for domestic producers. Mr. Kuchma's proposal has been partially
implemented; loan rates have been lowered somewhat, although not to the
extent where they could be actually used by the real sector, for the first
quarter's money-printing plan could turn out over-fulfilled. Third, word
has spread about a draft presidential decree envisioning the forced merger
of the commercial banks failing to meet minimum statutory fund requirements
such that they would become a "Unified Regional Development Bank" with
no one seriously considering the bank shareholders' interests. Fourth and
last, the Ukrainian Premier decided to personally act as Savings Bank manager.

In fact, the latter two scenarios deserve special notice, for here one
can finally understand what the Cabinet is actually concerned about. To
begin with, one ought to shed all illusions about the Savings Bank idea
being in any roundabout way intended to improve Ukraine's investment climate
or serve any depositor or borrower interests. Quite the contrary. Practically
as soon as the Cabinet passed its resolution with its crucial impact on
the Savings Bank, the National Bank resolutely opposed the SB privilege
to loan to all those "non-banking establishments." In an interview with
Ukrainian News, NBU second-in-command Oleksandr Kyreyev said, "We are now
working on a resolution to restore interbank crediting, provided we can
use procedures (i.e., loan issuance ones - Ed.) that would be enacted
by the Supervisory Board (the one headed by Premier Pustovoitenko - Ed.).
As for crediting legal entities, I am sure the license could be renewed
at this stage, for I don't think that they would want to bear any additional
risks... We announced our approach back in September. Under law this bank
has government guarantees covering its deposits, so it cannot assume any
commercial risks."

But suppose the government succeeds in setting up a bank - "based on
the Savings Bank" in Premier Pustovoitenko's own words, capable of accumulating
maximum citizens' savings, subsequently to invest this money in the ailing
"domestic economy," using the good old Soviet pattern, and then get the
other banks to hand over the accounts of large state enterprises, ministries,
off-budget funds (Pension Fund, et al.). In this case it would be safe
to assume that the campaign of "nationalizing" the monetary flow, getting
all this money to serve the president campaign, has reached its final stage.
Without money (i.e., when almost all monetary resources end up in the hands
of two state banks, one set up on a coercible basis, along with several
other former state banks), all the other banks would see no sense in staying
in business any longer.

Obviously the National Bank likewise sees no sense in any further attempts
to "enhance" the Ukrainian banking system by tightening the bank reserve
and other fiscal screws (raising an insurance fund using individual deposits
or creating "reserves" to provide for investment and deposit risks). Naturally,
the NBU's "special stand" greatly irritates its opponents. Indeed, how
can a normal Ukrainian ranking bureaucrat respond normally when reminded
that he has to redeem any of the loans granted any of the enterprises under
his command, pressed by the government, to the tune of UAH 1.6 billion?
The more so that the Cabinet is prepared to acknowledge not more than 600
million as its liability? Here getting half these banks nationalized by
a stroke of a top-level decision-maker's pen would solve the problem once
and for all, making all the interested parties happy, using the law about
the minimum size of the statutory fund. And Verkhovna Rada would be sure
to support the move, using its Red majority. Why not? Sounds reasonable.

All the indicators point to the fact that the Ukrainian banking system
has reached the point  where it has to be reformed. In other words,
that system is doomed to undergo some kind of transformation resulting
is its being turned into a real system of credit institutions. Does the
top executive branch have any desire for such a transformation? Are the
authorities doing anything to help the process? In a way it does. But an
indicator of how is an incautious remark made by the Premier: Soviet banking
system catering to the government machine and state sector.

And does Ukraine really have any alternative? Strangely, it still does.
There is even an alternative ( also "desired") project with the Premier's
signature. This project was approved by Ukraine's international donors,
not shrugged off, but apparently "misunderstood" by the Cabinet, because
the document foresees transforming Ukrainian banks into entities having
nothing to do with the traditional Soviet structures, of turning them into
full-fledged financial institutions with all the attendant consequences
for the state. In fact, receiving yet another financial sector adjustment
loan explains the existence of documents running counter to the Cabinet's
campaign needs and projects allegedly aimed at getting the nation's business
back in shape. Thus, the Ukrainian government had to remember its bank
liabilities shortly before Kyiv was visited by a team of World Bank experts.
It was then that Deputy Premier Serhiy Tyhypko sagely informed the Ukrainian
public that the Cabinet was ready and willing to consider bank proposals
with regard to the redemption of their debts: "Considering the status of
payments to the budget, it would be difficult to expect such repayments
using 'live money.' The government will, therefore, show a constructive
attitude toward any bank proposals concerning such repayment using other
financial sources. This could include combining their own funds and government
securities, tax recision, or trading liabilities for shares of enterprises
being privatized."

Now what the government owes the Ukrainian banks is something resulting
from the nonpayment of loans given Ukrainian enterprises on stern Cabinet
instructions during the years of independence. Most of such loans come
from former state banks - e.g., Prominvestbank, Bank Ukraine, and Ukrsotsbank.
According to Mr. Tyhypko, the overall amount of such liabilities or renewed
loans amounts to UAH 2,437 million, or 21% of the credit portfolio. All
told, as of March 1, 1999, bank loans amount to UAH 9,170 million, about
10% of GDP.

Summing up this brief analysis, this author ought to point out that
Eastern Europe's banking reform, resulting in civilized banks ridding themselves
of previous and current bad debts, cost the Czech Republic $4.5 billion
(12% of GDP). Likewise, Poland lost $2.5 billion (3% of GDP) and Hungary
$3.5 billion (10% GDP). No one can tell how much Ukraine will suffer from
its own banking reform. There are only more or less reliable grounds for
assessing the damage to be brought about by the official trend; if the
executive succeeds in carrying out its plans before the October elections
the price to pay will be much higher than it could have been, under different
circumstances.

By Iryna KLYMENKO, The Day

 

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