Yakiv Smolii, the governor of the National Bank of Ukraine, has resigned due to “systematic political pressure” — pressure that some believe came directly from President Volodymyr Zelensky and quite possibly billionaire oligarch Ihor Kolomoisky, who has been trying to regain ownership of PrivatBank after he stuck taxpayers with a $5.5 billion bailout from alleged massive insider lending when he owned Ukraine’s largest bank.
Smolii submitted his letter of resignation to Zelensky on July 1, saying that he can no longer “fulfill my obligations to manage the activities of the National Bank and its cooperation with other state agencies,” the central bank announced on its website.
“For a long time, systematic political pressure has been exerted on the National Bank of Ukraine,” Smoli said in a statement. “With my resignation, I seek to warn against other attempts to undermine the institutional foundations of the central bank in Ukraine.”
I’ve submitted my resignation appeal to the President. This decision has been taken as an answer to systematic political pressure that denied fulfillment of my duties as the Governor. Let it be a warning for attempts to undermine institutional independence of the central bank. pic.twitter.com/cFQuAlakrM
— Yakiv Smolii (@YSmolii) July 1, 2020
For the resignation to happen, the Ukrainian parliament must vote on it. The parliament will meet on July 2 and July 3, but the resignation first has to be reviewed by a parliamentary committee. For this reason, it is unlikely that lawmakers will vote until July 3.
According to Natalia Bondarenko, an NBU spokeswoman, Smolii was not available for comment. She said, however, that he will release a separate video statement early on July 2.
Smolii was appointed to lead the NBU in March 2018, succeeding Valeria Gontareva, who led a massive clean-up of the corrupt banking sector. The central bank closed more than half of the 180 operating banks. Many collapsed after an orgy of insider lending and bank fraud that cost taxpayers at least $20 billion. No one has been prosecuted for bank fraud. Before that, Smolii served 10 months as acting head. The NBU governor is appointed for a seven-year tenure.
Just a month ago, in May 2020, Smolii told BBC Ukraine that he was going to lead the NBU until 2025.
“My tenure ends in 2025. That means that there’s still time and there are a lot of tasks that we need to do,” Smolii said.
National Bank under Zelensky
In February 2019, then-presidential candidate Zelensky met with representatives of the International Monetary Fund and insisted that he would work on “ensuring the stability of the banking system in Ukraine and the independence of the National Bank” if elected president.
In April 2019, Zelensky said again that he would not fire Smolii if he won the presidential election. “You know that, according to the law, (the appointment of an NBU head) lasts for seven years. Nobody will fire him,” Zelensky said.
In fall 2019, Smolii said that he wasn’t facing any pressure from the government or Zelensky.
“We have fairly good cooperation,” he told Voice of America’s Ukrainian Service in an interview on Oct. 18, 2019. “Fairly good collaboration and we don’t feel any pressure on the National Bank.”
Swift reaction
According to Timothy Ash, an emerging markets analyst for Bluebay Asset Management Company, Smolii’s resignation had “been coming for a while.”
During Zelensky’s presidency, “the NBU has been coming under huge pressure from the forces of oligarchic state capture and Zelensky either did not understand that or did not care,” he said in an email message.
Ash credited Smolii and his team for “the incredible turnaround in macroeconomic stability in Ukraine with low inflation, a stable currency, and rising foreign exchange reserves with declining borrowing costs. This macroeconomic stability is now under threat.”
Smolii’s exit raises questions about the future of the International Monetary Fund lending program for Ukraine, Ash said. “The fund will want to see a credible replacement for Smolii.” Last month, the IMF agreed to lend up to $5 billion over the next 18 months to help Ukraine’s economy weather the COVID-19 crisis — and has already disbursed $2.9 billion. Further aid, however, is contingent on Ukraine implementing a number of policies, including guaranteeing the independence of the National Bank.
And the IMF has heaped praise on Smolii’s central bank, writing in a June 9 press statement: “The NBU has skillfully managed monetary policy during a very challenging period. Central Bank independence should be preserved, and monetary and exchange rate policies should continue to provide a stable anchor in the context of the inflation-targeting regime while allowing orderly exchange rate adjustment and preventing liquidity stress.”
When the news about Smolii’s resignation broke the IMF stressed that this is vital for Central Bank to keep independent as it used to be under Smolii.
“Under his leadership, Ukraine has made important strides in achieving price stability, amply demonstrating that an independent central bank is a key element of modern macroeconomic policymaking. That is why the independence of the NBU is at the center of Ukraine’s Fund-supported program, and why it must be maintained under his successor,” an IMF’s spokesperson said in a statement.
The G7 Ambassadors’ Support Group for Ukraine has issued a statement praising the work Smolii has done and urged Ukraine’s authorities not to overturn the success it has gained.
“An independent National Bank is a foundational achievement for Ukraine that has reduced corruption, driven growth & rescued a failed banking sector. To undermine this crucial institution would be a big step back and jeopardize the credibility of and support for Ukraine‘s reforms,” says the Group’s statement on Twitter.
However, noting that the board of directors of the central bank is still working, Ash called it “one bit of good news – I am sure they thought of resigning as well because the threats to NBU independence are so serious.”
Tomas Fiala: Authorities doing ‘exactly the opposite’ of what investors want
In response to questions from the Kyiv Post, Anna Derevyanko, executive director of the 1,000-member European Business Association, said that Smolii had been under pressure for a long time and that she saw his exit as “potentially” a threat to the NBU’s independence. She also sees the hand of Kolomoisky in Smolii’s ouster.
Tomas Fiala, CEO of investment firm Dragon Capital who is also the president of the EBA that Derevyanko heads, said Smolii’s resignation would lead to the prices of Ukrainian assets and the national currency, the hryvnia, falling.
“We will put new investments on hold as the authorities have been doing for the last five months exactly the opposite from what investors, both domestic and international, expect from them and advise them. This is the last straw,” he told the Kyiv Post in a message. “One can only guess what are the motives, complete incompetence or Russian motivated sabotage.”
Edward Chow, an energy expert based in Washington, D.C., stressed that he is not a central bank expert but that Smolii’s complaint of political pressure “fits into a trend of political intervention in the economy and rising concerns over preference for manual control at the expense of structural reform and professional competency.”
Andy Hunder, Morgan Williams concerned
Andy Hunder, president of the 600-member American Chamber of Commerce in Ukraine, said that “Smolii was hugely respected among the business community. The AmCham awarded him the Thanksgiving Award from the members for the great work that he and his team had done. The resignation comes at a bad time with Ukraine looking at an 8.2% gross domestic product decline. Businesses are now concerned about the future independence of the national bank management and the continuation of the IMF program.”
Morgan Williams, president of the 200-member U.S-Ukraine Business Council, said “the international private business community is very surprised and deeply concerned by the resignation.” Williams noted that “this resignation comes on top of several other unexpected and disruptive changes in the government of Ukraine in 2020. The private business community believes that Smolii has done an outstanding job and has helped provide macroeconomic stability, lower inflation rates, declining interest rates, a stable currency, and increased foreign-exchange reserves.”
Williams stressed that “it is extremely important for the NBU to be an independent institution. The Smolii resignation does nothing to improve the view of private business, investors, financial institutions, and others in doing business in Ukraine…quite the opposite. Private business leaders need more very strong positive signals from Ukraine..not more negative ones.”
Anders Aslund: ‘This is disastrous’
“At a time of severe reform reversal, Smolii and the NBU were the last reformers standing. Now there is nobody left. This is disastrous,” said Swedish economist Anders Aslund, a senior fellow at the Atlantic Council think tank in Washington, D.C., and a longtime expert on Ukraine’s economy.
He also raised the issue of Kolomoisky, noting that Gontareva was forced out in May 2017 because she nationalized Kolomoisky’s PrivatBank in December 2016. Later, she was hit by a car in London and had her house outside of Kyiv burned down while her apartment in Kyiv was raided and her daughter-in-law’s car set on fire. “You can guess who did it,” Aslund said. He called Smolii “as soft-spoken as he is firm.” Before the banking clean-up engineered by Gontareva and her lieutenants, including Smolii, banks had capital equal to 8% of banking assets, but “took 80-90 percent of these assets for themselves as ‘loans’ never to be paid back. Since 2014, the NBU has cleaned up this bank robbery by ‘owners,’ and they don’t like it a bit. After having stolen their depositors’ money, they ask for ‘compensation’ for their theft from the state.”
Smolii fixed Ukraine’s twin macroeconomic problems — high inflation and an unsustainable exchange rate, he said. has been high inflation and an unstable or unsustainable exchange rate.
Aslund suspects Zelensky wanted Smolii out because he was an appointment of ex-President Petro Poroshenko.
“Smolii is not one of Zelensky’s people,” Aslund said. ” There are so many people in Zelensky’s circle who want such a good job, though presumably all are worse both professionally and ethically. Second, Smolii has been mean to Zelensky’s close friend Kolomoisky, not giving him the billions that he so desires. It increasingly appears as if Zelensky is unable to say no to Kolomoisky. Wasn’t he supposed to fight against and not for oligarchs and corruption?”
Aslund: “This is a very sad day for Ukraine. Formally, the Rada has to accept Smolii’s resignation. If it has any morals, it would refuse his resignation and celebrate his achievements. If Zelensky wants to do good for his country, he should refuse Smolii’s resignation, apologize, and ask him to continue.”
Gontareva herself called her successor Smolii’s resignation “a disaster” too.
“The NBU was the last bastion of reforms in Ukraine. The political pressure was endless as all the rascals began to appear on all fronts and undermine the reforms we have made. As soon as they received the IMF tranche, the money from the European Union, and the World Bank, they launched an attack. (You can see it in) decisions of corrupted courts, decisions of a completely incompetent Verkhovna Rada, a weak economic bloc of the Cabinet of Ministers,” she said to the Novoe Vremya news website.
Possible successors
Assuming that parliament, which is controlled by Zelensky’s 247-member Servant of the People party, approves of Smolii’s departure, speculation turns to succession. Two names being touted will not inspire market confidence in the view of some in the business community who are watching the situation closely.
One of the potential candidates being bandied about is Kyrylo Shevchenko, chairman of Ukrgasbank.
Another is Bohdan Danylyshyn, chairman of the council of the National Bank of Ukraine. He was a former economy minister from 2007-2010 in the government of Prime Minister Yulia Tymoshenko. He fled to the Czech Republic and won political asylum from corruption charges made during the administration of President Viktor Yanukovych, ousted by the EuroMaidan Revolution in 2014.
