Half of Ukraine’s population — roughly 22 million people — has an account in PrivatBank, the country’s largest bank. That’s a lot of power for one financial institution and any change in its management could have lasting effects on the country’s financial stability.
That is why Engin Akcakoca, the head of PrivatBank’s supervisory board, couldn’t imagine how it could be allowed for the bank to be returned to its former owners, oligarchs Ihor Kolomoisky and Gennadiy Boholyubov.
It was nationalized in 2016 due to a $5.5-billion hole in its ledger — money that was allegedly removed by the oligarchs through fraudulent schemes. Kolomoisky denies any wrongdoing.
But Ukraine’s judicial system has surprised Akcakoca. On April 18, the Kyiv District Administrative Court ruled that PrivatBank’s nationalization was illegal, issuing its decision just three days before the second round of Ukraine’s presidential election.
“I never thought that the decision generated by the input of hundreds of experts in the NBU (National Bank of Ukraine), in the Ministry of Finance, in the DGF (deposit guarantee fund) can be overruled,” Akcakoca told the Kyiv Post on April 25. “I never thought that it would be possible.”
Akcakoca, who previously headed the Savings Deposit Insurance Fund of Turkey in 2001-2004 during the country’s financial crisis, was greatly involved in stabilizing Turkey’s banking sector. Under his watch, four state-owned banks were restructured, private banks underwent a recapitalization process, 18 banks had their solvency restored, and the government intervened in seven problem banks.
And not once was a bank returned to its former owner.
“Of course, intervention or (previous bank) administrations taking action are subject to court scrutiny. We (experienced) these kinds of court cases in Turkey as well. But we were never in a situation to return the bank,” said Akcakoca.
Great interest
Back in 2016 the Ukrainian government was forced to inject $5.5 billion of taxpayers’ money to replace missing capital and avoid liquidating Ukraine’s banking giant.
Kateryna Rozhkova, first deputy governor of the NBU, said that nationalizing PrivatBank was a necessary step. It took place in accordance with the current legislation as the bank had been recognized as insolvent.
Two years later, by the end of 2018, PrivatBank was able to claw its way out of the red and even showed positive results — Hr 11.67 billion ($432 million) in profit.
“PrivatBank is solid, adequately capitalized with high liquidity and quality staff. It’s much ahead of many banks in the West with respect to its information technology and market leadership,” said Akcakoca.
PrivatBank’s new management took several important steps to strengthen the bank during this period.
“We implemented a risk management system in the bank immediately, which didn’t exist at all. We also implemented an internal audit system in the bank which was very weak during the previous shareholders’ time,” Akcakoca said.
“And we fully provisioned for the bad loans that were left to the bank by the former major shareholders,” he added.
But now the Kolomoisky-Boholyubov factor and recent political events are again sparking concern in the country.
“Around PrivatBank, too many things are cooking at the same time,” Akcakoca said.
In particular, the business community fears that PrivatBank will be returned to its previous owners under Ukraine’s next president, Volodymyr Zelenskiy, who was elected on April 21.
A comedic actor by profession, Zelenskiy had business connections with Kolomoisky: his shows were broadcast on the oligarch’s 1+1 television channel. Zelenskiy has said he would not return the bank to Kolomoisky.
According to Ruslan Chornyi, a managing partner at finance company Financial Club, the bank itself is just a tool for Kolomoisky and Boholyubov. Currently both are embroiled in litigation and their assets are frozen globally. Should the nationalization of PrivatBank be ruled illegal, it would likely derail the legal proceedings against the two oligarchs and allow them to remove the arrests on their assets.
At the same time, the NBU, the Ministry of Finance, and the Deposit Guarantee Fund will not give up easily. They plan to appeal against any ruling that threatens to return PrivatBank to the oligarchs.
Risk of financial collapse
They have good reason to fight. If the bank is returned to its previous owners, that will be a major blow to the country’s financial sector.
Should PrivatBank’s nationalization be reversed, the state will withdraw the $5.5 billion it injected into the bank. After that, the bank will be immediately recognized as bankrupt and liquidated, Valeria Gontereva, the former NBU head who oversaw the nationalization, told Radio Free Europe/Radio Liberty.
“What she is saying is true. This is how such banks are resolved around the world. This is not something unique for Ukraine,” Akcakoca said.
But, for Ukraine, that would mean serious financial and economic consequences.
“(This would be) a blow to financial stability,” Akcakoca said. It would also be a blow to Ukraine’s relationships with the West — the bank’s nationalization was one of the many requirements for further collaboration between Ukraine and the International Monetary Fund (IMF).
Without the IMF’s support, more international financial organizations and creditors will halt their support for Ukraine as well.
“You’re in a position to attract foreigners, either by credits or by direct investments into the country. Why lose this opportunity?” Akcakoca said.
“If things go wrong with respect to this process and if there is a deviation, then the West will stop talking to Ukraine.”
Ukraine’s banking jewel
Over the past few years, Akcakoca has observed significant reforms in Ukraine and improvements in the health of its financial system, including the independence of a central bank.
“Things are moving in the right direction. Now, after the cleanup and capitalization of the system is finished, (the NBU) is strengthening the regulatory framework,” Akcakoca said.
For Ukraine’s financial system, NBU independence means — amongst other things — that foreign exchange rates and local currency interest rates are independently determined.
“The NBU has been very instrumental in undertaking reforms in this country. I think it’s a jewel institution for Ukraine. It’s a star! So value it,” he added.
Akcakoca forecasts few risks in relation to changes in NBU’s management in the foreseeable future.
“If I were Ukraine, I would not touch any structural reform that was already done in this country,” he said. “Moreover, I would speed up undertaking further reforms that would bring the level of Ukraine up.”
