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PrivatBank plots course through Ukrainian storms

The chairperson of PrivatBank’s supervisory board talks to James King about the legal challenges which followed the bank’s nationalisation and the ongoing struggle to bring reform to Ukraine.
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Sharon Easky

Sharon Easky

Since the Maidan revolution of 2014, Ukraine’s development trajectory has been defined by turbulent progress. Encouraging political and economic reforms have occurred in fits and starts, against a backdrop of a simmering conflict in the east of the country. But the maturation of Ukraine’s democracy has been dented by the presence of powerful oligarchs, who continue to vie for influence in the corridors of administrative power. These trends, among others, have also shaped the recent evolution of the country’s banking sector and, in particular, the fortunes of Ukraine’s largest lender, PrivatBank. 

Following its nationalisation in 2016, in response to the authorities’ discovery of a $5.5bn hole in the balance sheet and as part of a wider clean-up of the banking system, the lender has charted a course towards sustainable long-term growth. It has done this while fending off legal challenges by one of its former owners and co-founders, businessman Ihor Kolomoisky, who contests the basis of the nationalisation. The resulting struggle for control of the bank has come, in many ways, to be one of the defining stories of Ukraine’s contemporary political economy. 

Step in right direction

In the contest’s latest development, the Ukrainian parliament, known as the Verkhovna Rada, passed a banking reform law in May 2020 designed to prevent nationalised lenders falling back into the hands of their previous owners. Dubbed in some circles as the anti-oligarch banking law, or even the anti-Kolomoisky law, its approval is seen by reformers as a boon for Ukraine and its banking system. 

“It certainly is a significant achievement for the banking sector and for Ukraine’s overall development. The specific issue it addresses pertains to the rights of owners and others – principally creditors – to challenge the nationalisation decisions taken by the central bank,” says Sharon Easky, chairperson of PrivatBank’s supervisory board, former adviser to the US Treasury’s Office of Technical Assistance and expert adviser to the International Monetary Fund (IMF). 

The introduction of the law was crucial not only for Ukraine’s longer-term development, in terms of bolstering the powers of the central bank, but also for its immediate financing requirements. A $5bn IMF stand-by arrangement, issued in June 2020, was contingent on parliamentary approval of the law. “There was a lot at stake. To have this law passed in a way that gives the central bank more authority to carry out its responsibilities, in a way that is appropriate and more consistent with international best practice, is a huge move forward for Ukraine. It absolutely is,” says Ms Easky. 

Pivotal moment

For PrivatBank, the passage of the law represents a pivotal moment in its post-2016 development. “There was a clear and present threat that the Ukraininan courts might at any time decide to reverse the nationalisation decision and potentially give the bank back to the previous owners. The fact that we no longer have to worry about the bank going back to the former owners is a tremendous relief. It allows us to focus on the future in more ways than just operationally. It allows us to realise that that significant portion of the bank’s past really is behind us,” says Ms Easky.

As a result, the bank’s leadership can now focus on the full spectrum of its future ambitions, from product and service development to the ultimate goal of privatisation. “Our mandate, which is part of the state-owned bank reform initiative in Ukraine, is to privatise the bank and maximise the value for the shareholders, which are the Ukrainian people. We have been moving forward with that. [But], in recent months, we have been assessing the strengths of the bank, where the market seems to be moving, how we can improve the products and where we want to position the bank. We just get to spend more time focusing on today and the future,” says Ms Easky. 

Even so, a range of legal struggles with the banks’ former owners are continuing at home and abroad. PrivatBank’s board is pursuing claims amounting to $10bn across a number of jurisdictions, including England, Cyprus, the US and Israel, with respect to schemes it says bear all the hallmarks of money laundering and fraud.  

“I think it’s important for everyone to realise that the cases that the board of the bank has launched are, in our view, well grounded. The evidence is clear and substantial that activities occurred in the bank that were improper. We are obliged to pursue cases to recover the losses that were incurred,” says Ms Easky. 

Threats to reforms

Meanwhile, in the choppy waters of Ukrainian politics, other challenges are coming to the fore. In particular, powerful vested interests, that span the breadth of the country’s political and economic operating environment, are exerting pressure on the apparatus of government. “There are some near-term threats. There seems to be a campaign that is being carried out through political venues, by [non-official] sources of [domestic power], that is attacking the overall reform efforts,” says Ms Easky. 

Undermining Ukraine’s improving standards of corporate governance appears to be one dimension of this effort. “There are some initiatives that I have read about that include reducing the presence of foreign nationals on supervisory boards, changing the level of authority of the independent boards and otherwise just trying to unwind some of the reform efforts that have been implemented,” says Ms Easky. 

The government’s intentions, meanwhile, remain somewhat opaque. Critics of the current president, Volodymyr Zelensky, point to his recent track record of removing reform-minded leaders in positions of authority, in favour of younger or more pliable figures. In early July, for example, Ukraine’s widely respected central bank governor, Yakiv Smolii, quit his role, citing political pressure in what was seen as a blow to the president’s reformist credentials. As a consequence, some critics argue that the power of the country’s oligarchs, through their ability to influence the political arena, is on the rise. 

Ukraine’s pro-reform movement, however, is coalescing in an effort to enhance corporate governance standards in order to diminish corruption and promote economic development. “What we are seeing as a by-product of these challenges is a coalition of reformers coming together and appropriately realising that we need to do a better job,” says Ms Easky. 

Among other measures, this will require a more effective communication of the benefits of both good corporate governance standards, as well as the positive impact of international expertise. “It’s a legitimate question: why are there so many foreigners running some of the biggest companies in the country? We should be able to answer that. And we need to be able to show how we add value,” says Ms Easky. 

Weather the storm

Beyond these issues, Ukraine’s banking sector is now dealing with the fall-out from the Covid-19 pandemic. By June the number of cases was climbing swiftly, even though the country as a whole has, so far, been hit less hard than many of its European peers. For PrivatBank, an expected drop-off in performance linked to Covid-19 follows a record setting 2019, where the lender achieved net profits of Hrv32.6bn ($1.2bn), the strongest in its history. It was also the most profitable bank in Ukraine over the period. As such, it is in a good position to endure a period of uncertainty. 

“We are pleased that our projections show that the bank is going to be able to weather this storm in 2020, as well as into the next several years. We feel that, in part, that is because the bank is very well positioned. We have done a lot of planning and management of our investments and cash over the last several months. We have focused a lot on making sure the bank can continue to operate in any scenario,” says Ms Easky.

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Read more about:  Central & Eastern Europe , Ukraine