Insolvent bank costs passed on to taxpayers and donors
The National Bank of Ukraine published a list of banks it had refinanced throughout the course of 2014. Many of them were judged insolvent.
The 2015 State Budget that was passed at the end of December has been the subject of much debate, both within the Verkhovna Rada and with the IMF. The proposed expenditures, up nearly 20% from last year’s budget, include hefty sums of support for banks. 36.5 billion hryvnia ($2.03 billion) has been set aside for saving bankrupt banks, while another 20 billion hryvnia ($1.11 billion) in financing has been reserved for the national Deposit Insurance Fund. And yet these sizeable figures pale in comparison to 2014’s interventions.
In a welcome recent move towards increased transparency, the National Bank of Ukraine (NBU) published a list of banks it had refinanced (replacing one debt with another under different terms) throughout the course of 2014. All in all, the National Bank provided 222.3 billion hryvnia (or about $12.35 billion) in support for banks, 115.6 billion hryvnia ($6.4 billion) of which was in long-term loans. An astounding jump from the 71.5 billion hryvnia ($3.97 billion) in 2013. Given the NBU’s meager $7.5 billion in foreign reserves and a currency struggling against steep devaluation, this is clearly a staggering figure.
Ukraine received roughly $8.94 billion in financial assistance in 2014 from the the international donor community. The IBRD, IMF, US and EU all offered macro-financial assistance that helped Ukraine to replenish its foreign reserves and service its most pressing debts. It is not much of a surprise that the banking sector was in particularly rough shape, with a reported $20.5 billion in external debts towards the end of 2014, considering Ukraine is facing the worst financial crises in its short history since gaining independence.
By the Head of the NBU’s own admission, the banking sector remains an area where oligarchs are able to continue utilizing fraudulent and corrupt schemes to line their own pockets. A push to shut down these and other schemes are reportedly on their way, but the damage has already been done.
Of the 75 banks that received support from the NBU, around 15 banks received short-term loans to simply stay open, but were ultimately placed under provisional administrative control by the authorities. 16 other banks who received loans from the NBU were judged insolvent, including two of its largest commercial banks (VAB and CityCommerce). As of the end of January, three more banks were deemed insolvent by the NBU, belying a growing problem in a banking sector highly dependent on influxes of cash from the National Bank to keep it afloat.
The largest bank bailout packages were given to the current Dnipropetrovsk Oblast Governor’s own PrivatBank (20 billion hryvnia or $1.1 billion). PrivatBank is currently in good standing, so this may be considered a success story for the NBU. On the other hand, judging by the Head of the NBU’s comments about oligarchs (like PrivatBank’s majority shareholder), she personally may hold a different view.
For its troubles, VBR (The All-Ukrainian Bank of Development) received 900 million hryvnia ($50 million) before being ruled insolvent at the end of 2014. Its sole shareholder, Oleksandr Yanukovych (son of ex-President Viktor Yanukovych), is the subject of EU sanctions. Other banks connected with former senior members of the Yanukovych administration (and also on sanctions lists) received some financial support as well.
There are other curiosities as well. VAB bank (not to be confused with VBR) received one of the largest bailout packages offered at 5.5 billion hryvnia ($305.6 million), but late last autumn it was ruled insolvent by the NBU and now looks like it may be liquidated altogether. Its stockholders are pushing the Ukrainian government to come up with money to reimburse them, to say nothing of its regular account holders. The bank’s main shareholder, a former Deputy Head of Naftogaz (2006-2007), also owns 100% of the Financial Initiative Commerical Bank’s shares. Financial Initiative Commerical Bank received a 8.3 billion hryvnia support package ($461.1 million) and, for all appearances, looks like it is doing well.
There are larger trends at play here. The owner of Ukraine’s largest bank, PrivatBank, also holds a 42% share of UkrNafta – the country’s largest gas and oil producer. The government has recently accused UkrNafta of not paying the state 1.6 billion hryvnia ($88.88 million) that the company owes. The strange irony being that the state-owned budgetary blackhole known as NaftoGaz holds slightly over 50% of UkrNafta’s shares and is likely also culpable for non-payment itself. Ukraine’s ‘quasi-fiscal’ energy sector, among other items, were the reason that the U.S. State Department in its 2014 Fiscal Transparency Report categorized Ukraine as making “no significant progress” in meeting the minimum requirements for fiscal transparency last year.
Naftogaz will undergo a long overdue audit by Deloitte this year, though the issues with the energy sector are much larger than Naftogaz. Ukraine’s minimal foreign reserves and $11 billion in loans due this year, on top of prepayments for gas to Gazprom, cannot be managed without support from the donor community. The U.S. Treasury’s recent signing of a Declaration of Intent to cooperate in providing credit guarantees for a total of $3 billion dollars, in addition to the EU’s offer to provide €1.8 billion in loans and a long-awaited loan package from the IMF are clearly badly needed if Ukraine hopes to avoid defaulting.
Indeed, with the help of the international donor community, Ukraine was able to pay its $3.1 billion gas debt, among other debts, as 2014 came to a close. Yet a portion of those funds also went towards providing 13.18 billion hryvnia ($732.1 million) in credit to banks that are now insolvent or in the process of being liquidated. Ultimately, the 61.5 billion hryvnia ($3.42billion) bill to prop up the banks will be footed by taxpayers and donors alike should nothing change.