TENDENCIES

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