Gra­ham Stack and An­drii Ian­it­skyi: The rise and fall of Pri­vat­bank

Kyiv Post Legal Quarterly - - Contents - By Gra­ham Stack and An­drii Ian­it­skyi

Edi­tor’s Note: Gra­ham Stack and An­drii Ian­it­skyi are the au­thors of “Pri­vat story: The rise and fall of Ukraine's largest bank,” a book look­ing into the his­tory of Ukraine’s largest bank — Pri­vat­bank, cre­ated by Ukrainian oli­garchs Ihor Kolo­moisky and Gen­nadiy Bo­holyubov.

The night from Dec. 15–16, 2016, was frosty and clear. Twenty mil­lion clients of Ukraine’s largest bank, Pri­vat­nank — half of all Ukraine’s adults — were fast asleep when the fate of their sav­ings was de­cided in the pres­i­den­tial ad­min­is­tra­tion.

The li­a­bil­i­ties of Pri­vat­nank to its cus­tomers in 2016 amounted to Hr 195 bil­lion, or about $7.5 bil­lion. The lion's share — more than two thirds — were the de­posits of or­di­nary Ukraini­ans. The sum is enor­mous. Ukraine spent the same amount that year on roads, pen­sions and so­cial ben­e­fits taken to­gether.

Could the bank meet its obli­ga­tions? The Na­tional Bank of Ukraine — the reg­u­la­tor of the bank­ing sys­tem — had be­lat­edly un­der­stood that the bank was a fi­nan­cial pyra­mid with a bal­ance-sheet hole of Hr 113 bil­lion, and that this hole was grow­ing.

The own­ers of the bank dis­puted this assess­ment, and in­sisted that all prob­lems were tem­po­rary or cre­ated de­lib­er­ately by the cen­tral bank. The ne­go­ti­a­tions had dragged on for 18 months. Dur­ing this time, the NBU closed down over 80 other banks. But Pri­vat stood alone. The of­fi­cials did not dare to touch it. Over 25 years, the bank had reached a size that made it the cor­ner­stone of the na­tional fi­nan­cial sys­tem.

So, long af­ter mid­night on Dec. 16, on the fourth floor of the pres­i­den­tial ad­min­is­tra­tion, the many months of talks reached an end. A deal was struck — and sym­bol­i­cally

marked by open­ing a bot­tle of white wine.

Bil­lion­aire Pri­vat­nank own­ers Igor Kolo­moisky and Gen­nady Bo­golyubov agreed to trans­fer the bank peace­fully to the state, ac­cord­ing to a spe­cial pro­ce­dure that would safe­guard the na­tions’ sav­ings.

The agree­ment was set down in a let­ter one page in length writ­ten by the bank's main share­hold­ers to Prime Min­is­ter Volodymyr Groys­man. The le­gal sta­tus of this let­ter raises ques­tions, and it re­mained a se­cret to the gen­eral pub­lic for an­other six months.

In the evening on Sun­day, Dec. 18, the Cabi­net of Min­is­ters met ur­gently and se­cretly to ap­prove the de­ci­sion. And on Dec. 21, the Min­istry of Fi­nance bought the bank from the Fund for the nom­i­nal Hr 1 — the equiv­a­lent of 5 U.S. cents.

Five years pre­vi­ous, the own­ers of Pri­vat­bank had val­ued the bank at $6–7 bil­lion: in Ukraine the bank con­trolled more than a third of bank de­posits, there were sub­sidiaries in Rus­sia, Ge­or­gia, Latvia, Italy, Por­tu­gal and Cyprus, there was an ex­ten­sive net­work of branches with 20,000 em­ploy­ees, the most ad­vanced IT tech­nolo­gies and In­ter­net bank­ing en­sur­ing state-of-the-art ser­vice. Over 5 mil­lion peo­ple used the on­line pay­ment sys­tem Pri­vat24.

And now this vast fi­nan­cial ma­chine was sold to the state for a nickel.

It was not easy to write a book about Pri­vat­bank. Ev­ery sec­ond per­son we tried to talk to about the bank sug­gested we "meet again in 30 years’ time" or sim­ply de­clined. Oth­ers re­quested anonymity. And one for­mer em­ployee asked for help in en­ter­ing a wit­ness pro­tec­tion pro­gramme.

All the more valu­able were the peo­ple who did agree to talk to us: For­mer CEO Sergei Tigipko, cur­rent CEO of Pri­vat­bank Olek­sandr Shlya­pak, fi­nance min­is­ter at the time of na­tion­al­i­sa­tion Olek­sandr Dany­luk, cur­rent head of the Na­tional Bank of Ukraine Yakov Smolii, deputy head of the NBU Kateryna Rozhkova, head of the State De­posit Guar­an­tee Fund Kostyan­tyn Vorushy­lyn. Oth­ers such as for­mer top man­agers of Pri­vat­bank Oleg Gorokhovskii and Dmitrii Du­biliet cor­re­sponded with us by email. Al­to­gether we recorded over 40 ex­clu­sive in­ter­views.

One au­thor flew to Geneva to meet with the for­mer share­hold­ers. But on ar­rival, they told him they had to post­pone, but would pay for all ex­tra ho­tel and travel ex­penses if he waited. Ob­vi­ously he re­jected the po­ten­tially com­pro­mis­ing of­fer. The in­ter­view did not take place, but we ob­tained their com­ment via lawyers.

We also drew on ex­clu­sive se­cret data de­tail­ing the lend­ing prac­tices of Pri­vat­nank 2014–2016. The au­thors re­ceived this data be­fore na­tion­al­iza­tion, at a time when any men­tion of bil­lions of dol­lars in in­sider lend­ing met with fu­ri­ous de­nials and threats of le­gal ac­tion from the bank.

Us­ing this data, we an­a­lyzed the real fi­nan­cial sit­u­a­tion at the bank — and dis­cov­ered that al­most all of the bank’s loans to­tal­ing over $5 bil­lion had gone to brass­plate firms. Despite the con­sid­er­able per­sonal risks, we pub­lished our find­ings — six weeks be­fore the au­thor­i­ties came to the same con­clu­sions.

The story of Pri­vat­bank holds a mir­ror up to Ukraine’s con­tra­dic­tory de­vel­op­ment dur­ing the first 35 years of its in­de­pen­dence: outof-con­trol oli­garchs with pri­vate armies, cor­rupt of­fi­cials, bril­liant IT de­vel­op­ers, charis­matic man­agers, re­gional busi­ness clans, brash brand­ing mix­ing the trans­gres­sive wit of Ukraine’s fore­most cross­dresser, Vera Sedyuk, with the deep wells of na­tional pride, an elec­tronic pay­ment sys­tem rev­o­lu­tion­is­ing trans­ac­tions com­bined with a Soviet-style branch-in-ev­ery-vil­lage net­work, global reach com­bined with a crim­i­nal core. Fi­nally, the ba­sic con­tra­dic­tion em­bod­ied in its name: orig­i­nally in­tended as a Swiss-style ‘pri­vate bank’ for oli­garchs, it had trans­muted into the na­tion’s sav­ings bank.

Our book is thus also a his­tory of Ukrainian in­de­pen­dence through the prism of the Pri­vat­bank: start­ing with the Soviet Kom­so­mol stu­dents or­gan­i­sa­tion, con­tin­u­ing through the eco­nomic col­lapse of the 1990s and the rise to riches of a se­lect few, the credit boom years of 2000–2008 bring­ing brief pros­per­ity to the peo­ple, the fi­nan­cial col­lapse of 2008, the era of to­tal cor­rup­tion un­der Vik­tor Yanukovych lead­ing to the Euro­maidan Rev­o­lu­tion and Rus­sia’s in­va­sion. It con­cludes on an un­cer­tain note: the na­tion­al­iza­tion of Pri­vat­bank was a nec­es­sary re­form backed by the in­ter­na­tional com­mu­nity — but one that leaves most of Ukraine’s bank­ing sec­tor in state hands, and mil­lions of cit­i­zens re­liant on the state bud­get to pay out their hard-earned sav­ings. Con­trol of key in­dus­trial as­sets is once again up for grabs, de­pen­dent on de­ci­sion in Lon­don courts. And no one has been pros­e­cuted.

So ul­ti­mately Pri­vat­bank was a pi­rate bank — but it was also an en­gine of change in Ukraine. This para­dox is the crux of our book.

Peo­ple pass by a Pri­vat­bank of­fice in Kyiv on July 30. (Oleg Pe­tra­siuk)

An­drii Ian­it­skyi and Gra­ham Stack’s book “Pri­vat story: The rise and fall of Ukraine’s largest bank” cur­rently is only avail­able in Rus­sian and Ukrainian but soon there will an English ver­sion as well. (Cour­tesy)

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