Saving the Savings Banks
At present, the World Bank and International Monetary Fund have no “problems in principle” with Kyiv that could prevent further loans, NBU head Volodymyr Stelmakh declared in New York on Monday October 29, accompanying Ukrainian Premier Anatoly Kinakh on his working visit to the United States. Mr. Stelmakh noted in particular that he meant the prospect of Ukraine receiving the second part of the first program adjustment loan tranche worth $100 million, scheduled for November.
Speaking about factors that could prevent receiving the loan, Mr. Stelmakh suggested that Ukraine’s nonfulfillment of the privatization parameters, especially in the electrical power industry, and problems with the 2002 budget.
However, the World Bank could add to the list a subject that had caused heated debate with the Ukrainian government shortly before Premier Kinakh’s visit: the status of the Ukrainian banking system. The issue arose with the presentation of the WB report, “Ukraine: Financial Sector and Economy. New Strategic Objectives.” Interfax Ukraine quotes the bank leadership as saying that during the ten years of Ukrainian independence no steps have been taken to make people trust Ukrainian banks. Simultaneously, the Ukrainian government blames the World Bank for this lack of trust. Vice Premier Vasyl Rohovy described the presentation as showing a “totally discourteous” approach in assessing the performance of the Ukreksimbank, Savings Bank, and cabinet. He further called it an “impermissible intrusion into such matters, because it concerns, among other things, the performance of a commercial bank, thus certainly damaging that bank’s reputation.”
The presentation of the said report took place in Kyiv and later in Dnipropetrovsk. Alan Roe, principal author, was on hand and said that they know of Ukrainian residents losing their bank deposits on more than one occasion, and that the Ukrainian authorities are still to work out its general principles relating to this sector; that there are no accounting conditions and clearly defined capitalization requirements.
In Dnipropetrovsk, the World Bank in the role of tutor of the Ukrainian government noticeably changed the tone of the discussion after receiving a sharp reprimand, perhaps realizing that he had gone too far, as evidenced by a letter received by the Editors from Gregory Jedrzejczak, head of the WB office in Ukraine. Several days earlier, he expressed a desire to begin discussion, declaring during the Kyiv presentation of the report that the Savings Bank is in a critical condition and ought to be liquidated under the existing rules. In his letter, Mr. Jedrzejczak does not deny his statement (after all, it was recorded not only by The Day’s reporter), but says that the Den feature “Our Ukraine II” [October 24, not translated in this digest] reflects his opinion about the Savings Bank incorrectly. Indeed, political correctness is a great attainment of modern civilization, sometimes making it possible to avoid conflicts. But the fact remains that it must be observed by persons holding official posts in the first place.
As it is, in his letter, Mr. Jedrzejczak repeats what the said feature is all about in a milder form. The following is the edited version of his opinion: the Savings Bank is really in a difficult financial situation, resulting from decisions made in the Soviet past, as well as from recent actions (like energy sector financing); it plays a special role in the Ukrainian financial system (system of payments and safeguarding the deposits of a large group of the population) and thus requires special attention by the government, which must be taken into account in future rescue plans; and World Bank experts are assisting the government in looking for the best solutions to the Savings Bank problem.
The World Bank stand has its history. From the first years of Ukrainian independence this international financial institution has tried, sometimes with propriety and sometimes bluntly, to point out the ineffectiveness of government-run or so-called system banks. The said report also devastates them. The situation with the Savings Bank is clear, the document reads. It is bankrupt and the regulatory authorities must solve the problems of liquidation. Yet even if the crisis could be avoided the bank would not have any real opportunities to reliably increase its assets in the middle term. The Savings Bank, which has suffered worst from political interference, might eventually turn into a universal government paying agent, rather than a general-purpose bank.
These statements were made by professionals who obviously had their reasons. However, a theoretical banking discussion does not necessarily have to be brought out in the open. This is what political correctness is all about. Of course, the Savings Bank management was especially chagrined to listen to such prophesies, for these executive are accountable to the state and stockholders for the bank’s financial health. “The information being spread about the critical situation with the State Savings Bank of Ukraine does not correspond to the actual situation,” the bank’s press service declared, referring to the financial indices covering the past twelve months (93% net asset growth during the period, citizens’ deposits up 54.2% to UAH 1,736,000, returns on transactions growing from UAH 2 million to 67 million, and 18.9% gross profit). The bank considers the dissemination of such negative information concerning the bank’s performance “obviously made to order” with the intention of “leading astray the people and is extremely damaging,” capable of destabilizing Ukraine’s market for banking services.
It is also true that the Yushchenko-Tymoshenko cabinet added to the Savings Bank’s problems. By appointing it to finance the Ukrainian energy market, already sinking under the weight of debts, the government made it shoulder a burden it could not bear. Nor did the Savings Bank act without cabinet instructions when providing loans for fuel procurements for electric companies that could not afford them. Other banks refused to join the consortium to finance such enterprises, and the Savings Bank had to carry the water alone. The president would later instruct the cabinet to relieve the bank of financing the energy market as an authorized bank. Other steps were also taken to revive it. Its new board of directors held a meeting not so long ago. Board member Serhiy Levochkin believes that the Savings Bank remain a unique financial institution with considerable potential, adding that this was repeatedly emphasized by the president, who also cautioned against risky operations and insufficiently considered actions.
There is yet another version explaining the reasons for the polemic. An NBU source told The Day that the World Bank’s alleged attack on the Savings Bank is caused, inter alia, by the fact that the Ukrainian banking market is becoming more attractive to foreign banks now that the national economy is showing some growth; such foreign banks encounter both certain governmental restrictions and the system banks having dominant market positions. For this reason, the expert says, the World Bank tried to clear the path for those foreign banks on the eve of Anatoly Kinakh’s visit to the United States. This might not be all that bad, all things considered. Foreign investment in the Ukrainian banking realm remains meager, less than $200 million. The question is whether a Ukrainian bank crisis (which can be easily provoked by a serial collapse of banks) will suffice to attract foreign investment. There is also a political version, whereby the campaign against the Savings Bank was meant as a warning for certain political forces allegedly standing behind the bank.
Prof. Oleksiy Plotnykov, Ph.D. in economics, commented on the Savings Bank situation for The Day, “I don’t think that the World Bank’s assessment contains a deliberate policy. More likely, it is an overly detailed and even overstated resume of its role in the economic transformation of Ukraine, an attempt to issue specific instructions concerning commercial structures. In this sense the World Bank has to some extent gone too far. I am not saying that this is interference, but it is over and above the limit of required economic recommendations.”
First Investment Group President Borys Soboliev told The Day that such assessments concerning structure-making banks of Ukraine must not be made in public, especially by colleagues. “It is not only indecorous, but also appears destructive, because it could have negative fallout for that bank. We know of its afflictions. Other banks also have them, but making it discharge functions alien to banks such as this one, as in the case of financing the energy market, can only disorganize its work. Now we must quickly form a task force to determine the Savings Bank’s prospects; we must hire professionals capable of rescuing our state banks.”
