“The National Bank of Ukraine must be independent.”
It’s an axiom verging on cliche, one that everyone has heard it in the business community.
Most officials at least outwardly agree that NBU independence means macroeconomic stability for Ukraine. But the upheaval in the bank’s highest echelons means independence may be on shaky ground.
Former governor Yakiv Smolii resigned in June due to “systemic political pressure.” Since then, two deputy governors have quit and one was not given a renewal when his term ended. Several other officials resigned as well, the latest being the financial monitoring director. This raised questions: Had they also left due to pressure? Or did Smolii’s successor Kyrylo Shevchenko ask them to leave in order to bring his own team into the central bank?
The other question is how the new team will conduct monetary policy and banking oversight.
The Kyiv Post spoke to two current deputy governors and multiple former officials and banking sector insiders, some of whom spoke on condition of anonymity because they feared backlash.
While most said that the resignations were voluntary, some left because they were disillusioned with constant interference in their work from outside officials and the NBU Council, an advisory and monitoring body. Some were also unhappy with the Hr 47,000 ($1,667) salary limit for public officials. A constant campaign of psychological pressure by oligarchs also played a role, they said.
And while most suggested that it is too early to draw conclusions about the bank’s new direction, others were worried.
“The risk to (NBU) independence has increased,” said Roman Borysenko, one of the recently resigned deputy governors, who was in charge of the NBU’s financial, administrative and operational functions.
Deputy governors Kateryna Rozhkova and Dmytro Sologub are the last remaining members of the bank’s old six-person leadership team. They acknowledged that some want them gone, like NBU Council head Bohdan Danylyshyn, who said they should stop “clinging to their seats.”
But they believe that the NBU’s collegial decision-making process is strong enough to withstand pressure.
“If we understand independence as collegiality and procedure, then that’s all working properly,” said Rozhkova. She, like many others, said that the new team needs some time to get up to speed and learn to work together, just as the old team had.
Pullback
In the past, it was practically a Ukrainian tradition for oligarchs and tycoons to start pocket banks to lend money to their own companies or siphon it overseas. It was just as traditional for these banks to go bust, but shamble on in a zombie-like state.
Starting in 2014, the NBU brought the hammer down. It yanked 100 insolvent banks off the market and put their assets into liquidation. This made the old NBU team very unpopular with the banks’ former owners. It also drew flak from some officials and industry players who thought the regulator was going overboard.
Former governor Valeria Gontareva got much of the blame, as did her team. Sologub rejected the idea that she controlled the team, but Gontareva’s legacy stuck to “her” people, including Smolii, Rozhkova and Sologub.
That led to some of the resignations. While there was no official goal to fire everyone, the NBU’s new leadership told staff that they acted too aggressively and at times unlawfully. Shuttered banks fought their shutdowns in administrative courts, which sometimes ruled in the former owners’ favor.
One official who recently resigned, who didn’t want to name themselves for fear of retribution, said the new leadership told them that the NBU should have been more conservative and worked within a narrower interpretation of the law.
“But the law can’t describe all possible scenarios exactly,” said the former official. “In that case, we may as well refrain from doing anything at all.”
The NBU’s reforms were roundly praised by Western institutions, namely the International Monetary Fund and the European Bank for Reconstruction and Development, which have made its independence a key precondition for future loans.
And there’s a reason for those conditions: Widespread bank fraud led to more than $25 billion in direct losses to Ukrainians.
The current deputy governors said Ukraine’s macroeconomic stability – much of which is thanks to the previous banking reform – is why it wasn’t hit as hard as some other countries by COVID-19 fallout.
But despite praise from the West, the NBU Council also wanted to conduct various audits of the NBU and create a permanent body that could defend previous bank owners. Some saw this as political pressure and felt the hand of oligarchs behind it.
On the inside
Pressure on the NBU has always existed and always will. Someone’s always going to hate the current team and what it’s doing, Rozhkova said.
“The national bank is a surgeon. It cuts,” said Sologub. “It often cuts across living tissue, without anesthesia. And that’s why the concept of independence exists.”
Over the years, the bank has faced paid and unpaid protests against its actions, social media campaigns and demonstrators staking out or putting coffins outside NBU officials’ homes. Sometimes, the harassment went further. Last year, Gontareva’s house was burned down even though she hadn’t worked at the NBU for years.
Still, until recently, there was a firm sense that the country’s leadership was actually interested in reforms to create a healthy and competitive financial sector, said former officials. This motivated NBU staff to support each other and push forward.
Danger
But recent changes create a dangerous precedent where the NBU is hamstrung in fulfilling its mandate, several bankers said.
The country has a five-year financial development strategy, created this spring. It states that the NBU is a reform leader, which can even go beyond its mandate to help other regulators. These regulators have signed the strategy, along with heads of commercial banks and a slew of experts. The old team stood ready to implement it.
However, the central bank’s new leadership is unwilling or unfamiliar with this plan and seems to want to pursue a much more limited strategy. This fed people’s disillusionment.
“All these threats and accusations that their work was done badly pushes people to think that they can’t work under these conditions,” said the former official. “They invested their soul and their intellect (into these reforms) and weren’t ready to turn away from them.”
Borysenko said that his department faced frequent attempts to interfere in its work. “The council,” he said, “very often insisted on having control over procedures in my area.”
Instead of developing conceptual guidelines and monitoring policy implementation, it wanted to “directly influence the construction of internal procedures,” he added.
Council chief Danylyshyn has been a frequent critic of the NBU’s direction. He submitted proposals to the parliamentary banking committee to make the council’s recommendations binding, allowing it to set monetary policy and make other big changes. They were not passed.
Speaking to media, Danylyshyn said that Smolii’s accusations of pressure were unfounded and that communication between the council and the NBU leadership improved after Shevchenko came in.
A former Party of Regions member, Vasyl Gorbal, recently joined the council, replacing a member whose term ran out. Gorbal is a former co-owner of Ukrgasbank and had been on the council twice in the past.
From the outside
Borysenko said that one reason for his resignation was the president’s spring order to cap public servants’ salaries. He said that when the NBU salary cannot compete with the private sector, the regulator will struggle to attract top talent. Ironically, the constitutional court struck down the salary cap on the day of Borysenko’s departure.
The NBU is also hindered by confusing requests from the executive branch. Banking sources said that officials from the president’s office and the cabinet don’t really understand how economics and finance works. They request incompatible things like high inflation and high economic growth.
Their demands change on the fly, one day calling for a weak hryvnia to protect exporters and another day freaking out about how a weak hryvnia will hurt Ukraine’s ability to service its debts.
A separate banking source, who also declined to be named to avoid backlash, said that a banking association head unhappy with penalties imposed by financial monitoring director Ihor Beryoza, complained about him, which led to Beryoza being asked to resign. The director’s resignation was made official on Sept. 21.
The source also said that an unofficial group of people connected through the Ministry of Finance exert growing influence over the NBU’s activities.
Governor Shevchenko is not really a member of this group but he is connected to it, as the former head of state-owned Ukrgasbank. New deputy governor Yuriy Heletiy, a former deputy finance minister, is a member as is new deputy minister Yaroslav Matuzka, a PrivatBank and Ukrgasbank alum, the source said.
According to the source, this unofficial group has a “Ministry of Finance mentality,” which doesn’t jive with the mission of a central bank. This may lead to poor decisions being considered.
Still, the source said Shevchenko is a real banking professional, who can push back against some of the worst ideas. Borysenko said that the presence of Sologub and Rozhkova will also help the NBU to make apolitical decisions.
Outgoing NBU officials said that they don’t know of a specific group trying to take over the NBU, but acknowledged that the cabinet has an oversized influence on banking policy. More than half of the banking sector’s assets and deposits are in state-owned banks. This gives the executive branch a lot of influence over the NBU’s direction.
Monetary policy
Shevchenko has previously said he wants easier access to credit for the real sector of the economy. But in July, he resisted lowering the interest rate from 6% even though that’s what the president wants.
He also said that the central bank will stick to its old program: inflation targeting and a floating currency.
But bankers saw that, in the past few months, the NBU has selectively intervened in favor of a weaker hryvnia, which hadn’t happened before.
“With the interventions that the NBU has been carrying out for the past month and a half, it became clear to all the players in the market… that the NBU will play along with or help fulfill the tasks announced and budgeted by the president,” said Tomas Fiala, head of Dragon Capital.
Serhiy Fursa, head of fixed income at Dragon Capital, explained that this started happening after deputy governors Oleh Churiy and Serhiy Ponomarenko, who were responsible for financial markets, left the NBU.
“When the hryvnia was threatened with appreciation, the NBU immediately went out to buy dollars,” said Fursa. “When the hryvnia moved in the other direction, the national bank didn’t do anything,” except when the hryvnia started falling extremely fast.
So far, these are the only signals that the NBU has shown about its new direction. Experts caution that it’s too early to judge the bank’s future plans as more information is needed.
But information has been harder to come by since the staff changes. “The NBU’s problem is insufficient communication,” Borysenko said. That makes it harder for the market to figure out what’s happening.
Institution over personality
Smolii’s departure made the International Monetary Fund suspicious and delayed Ukraine’s next loan tranche indefinitely. Earlier this month, the lender called on Ukraine to “protect the NBU’s independence.” Everyone is in wait-and-see mode on what the new team does.
The new deputy governors all come from a banking background.
Heletiy worked in the NBU from 2013 to 2015 and later joined the Ministry of Finance, where he eventually became the deputy minister. Two of the new deputy governors are from PrivatBank, which was nationalized in 2016. Oleksandr Shaban spent 24 years working at Privatbank and in 2018 joined its board, heading its retail business. In February, he started working as the NBU’s payment systems director.
Matuzka, a lawyer by profession, headed PrivatBank’s legal coordination and helped defend it from lawsuits filed by its former owner, oligarch Ihor Kolomoisky. He previously served on Ukrgasbank’s supervisory board and Russian-owned Sberbank’s audit committee.
Rozhkova and Sologub said that rather than looking at the individuals, it’s more important to focus on the institution. They added that Ukraine has something of a personality cult, being overly concerned with names and faces. Instead, it’s the institution’s decision-making process that will thwart narrow ambitions and let it withstand pressure.
“That is what will ensure what we have today: relative stability in a crisis,” Rozhkova said.
